Investment
Liquid Alts: Rising to the occasion
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How liquid alternatives, aided by higher cash rates, could help position portfolios to achieve 5% real returns.

Executive summary

  • In the years following the Global Financial Crisis, liquid alternative investment strategies ('liquid alts' or 'alts') have failed to match their pre-crisis performance.
  • Post-crisis returns have been dragged down by negative real (i.e. after inflation) cash yields, but this drag has likely been eliminated thanks to recent interest rate hikes by the Federal Reserve.
  • Buoyed by short-term rates above expected rates of inflation, liquid alts now look poised to deliver attractive real returns and outperform developed equity markets in the coming years.
  • Investors who redeem from alts today are exhibiting the classic investor behaviour of selling out as the opportunity set improves.
  • Considering the risks and perceived opportunities of GMO's alternatives strategies, we believe the alts in our asset allocation portfolios have the potential to deliver 5% real returns.
  • The improved prospects for alts and the attractive prices of emerging market value stocks indicate that our portfolios may be well positioned to outperform traditional balanced portfolios.
  • While the 5% real return target sought by many institutional investors will likely remain a challenging bogey for diversified portfolios in the coming years, we are increasingly optimistic about our portfolios' prospects for delivering 5% real.

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