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With the traditional 60/40 portfolio struggling to deliver the diversification benefits it once did, many advisors are turning to alternatives. But “alternatives” is a broad category that can be split into two high-level types: alternative assets and alternative strategies.
The former can be illiquid and difficult for clients to understand and implement (think private equity, private debt, and real estate as examples). The latter is far less utilized but can offer similar diversification and the potential for higher risk-adjusted returns without enduring the liquidity restrictions or opacity of traditional alternative assets.
This September, RPIA launched RP Alternative Credit Opportunities Fund (ACOF) to meet the rapidly growing demand for alternative mutual funds (also known as liquid alternatives).
Imran Dhanani, Principal, Head of Retail Distribution, discusses the advantages of incorporating liquid alternative credit strategies and where ACOF can fit into investor portfolios.
Why is this the right time to consider liquid alternative credit strategies?
Liquid alts offer a timely solution to the difficult allocation environment advisors are facing today. Markets continue to be marked by uncertainty, and many traditional asset classes, such as bonds and equities, continue to be more highly correlated than most investors would prefer. Traditional fixed income returns have been underwhelming over the past five years; however, many advisors are hesitant to shift their clients into alternatives, fearing that this may create new problems such as illiquidity, limited transparency, and operational complexity.
Liquid alternative credit strategies can provide a solution to these challenges – a sort of happy medium. They can combine the diversification benefits of alternatives with greater flexibility and much better liquidity. Some strategies can deliver equity-like returns with fixed income-like volatility, allowing advisors to improve risk-adjusted returns while keeping portfolios liquid and adaptable to changing market conditions.
Why have credit-focused liquid alternative strategies been so successful recently?
Liquid alternative credit strategies can make portfolios more agile and resilient – which is incredibly important amid heightened volatility. They can help advisors manage risk and diversify away from interest rate risk, while still investing in bonds with very low default rates and contractual obligations to pay coupons.
Most advisors already use an “alternatives bucket” for their clients’ portfolios, but the challenge has been achieving diversification within that bucket. Liquid alternative credit can complement traditional alternatives and bring balance in three primary ways:
- Diversification: Liquid alternative credit strategies can tactically limit exposure to interest rates and protect capital in environments where inflation and higher yields can negatively affect traditional equities and bonds. Alternative credit strategies can also capture significant upside in strong markets.
- Liquidity and transparency: Unlike many alternative asset classes, which can have lengthy lockups and inconsistent valuations, bonds get traded and priced every day, allowing for daily liquidity and transparency.
- Higher quality returns: Skilled managers can use long and short positioning, relative value trading, and tactical hedging to generate returns that go beyond traditional coupon clipping and provide returns not solely reliant on strong market conditions.
What makes RPIA’s approach to liquid alternatives unique?
We’ve been focused on alternative credit since our founding in 2009. Over the past 15+ years, we’ve built a robust track record managing some of Canada’s most successful long/short credit strategies and becoming one of the country’s largest liquid alternative credit asset managers with over $19 billion in AUM.
What sets RPIA apart is our track record managing alternative credit strategies across several market cycles – we’re not new to this. Our investment team, and our leaders in particular, are seasoned investment professionals with deep expertise in global credit markets and active trading. The firm was founded on the idea that this global and active approach is vital for Canadian investor portfolios. As we’ve grown, we’ve remained focused on addressing investor challenges while leveraging our institutional quality and scale.
What are the benefits of adding ACOF to an investor’s portfolio?
ACOF provides advisors with access to an unconstrained, institutional-quality alternative credit strategy targeting annual net returns of 7-9% with daily liquidity. We expect it to have a strong risk and return profile with the ability to provide diversification beyond conventional alternatives, giving advisors the flexibility to adjust portfolios effectively.
For advisors, ACOF can be positioned as an ideal complement to an existing alternatives allocation or the first step into alternative investments due to its simplicity, liquidity, and transparency. It could improve income generation and help investors who are targeting higher returns than those found in traditional bonds. This is especially critical in a higher-for-longer inflation environment or lower-yield environment moving forward.
How can advisors position liquid alternatives like ACOF in conversations with their clients?
Investors often view alternatives as complex, opaque, and illiquid, but liquid alternatives can be the exception. Advisors can highlight their advantages of liquidity, transparency, and diversification, to help investors understand that not all alternatives are the same.
Most investors are already familiar with bonds and their characteristics, and are often surprised to learn liquid alternatives can help improve returns and diversification by tweaking the way bonds are invested in. This could make them ideal for investors looking for real diversification and attractive returns across a market cycle without assuming the illiquidity risk of alternative assets.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Information presented by RP Investment Advisors LP (“RPIA”) is intended for informational purposes only. It does not provide financial, investment or other advice and should not be acted or relied upon in that regard without seeking the appropriate professional advice. Investors should consult with a registered investment advisor before investing in mutual funds.
