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Alts Democratized: A Practical Guide to Alternative Mutual Funds and ETFs for Financial Advisors, + Website by Robert J. Martorana, Jessica Lynn Rabe

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Chapter 18Fund Selection

Synopsis

Traditional thinking has often assumed that all alternative funds are basically the same, and the investment process may lump liquid alts together and dump them into the “alts bucket.” Looking ahead, it may be more useful to define liquid alts in terms of the functional roles of each fund, depending on its factor exposures and product design. So it may be time for alts to “kick the bucket” and shift to an approach such as the Micro-Endowment Model. This requires an expanded due diligence effort and a more complex portfolio construction process as advisors blend alpha, beta, and liquid alts in creative new ways. It also shifts the fee discussion from the product level to the portfolio level, allowing a wider range of fees for different investment strategies.

Liquid alternatives are often lumped into an “alts bucket” regardless of the underlying strategy. This process implies that the classifications are homogeneous and fungible, and any fund can be used as a portfolio diversifier. This approach may work with some funds, especially those funds that have a variety of underlying factor exposures. Indeed, it is time to for alternatives to kick the bucket approach and use a more robust process. We created a new framework as shown in Table 18.1—the Micro-Endowment Model (MEM). We introduced this concept in Chapter 15, and now offer additional details.

Table 18.1 Micro-Endowment Model

Asset Class Allocation Role of Asset: Type of Product
Equity ...

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