3 Liquid Alternative Funds That Bring the Defense

#Morningstar #DefensiveFunds #AlternativeInvesting

Diversification is the best defense against the unknown.

00:00 Introduction

00:41 BlackRock Global Equity Market Neutral BDMIX

01:10 AQR Diversified Arbitrage ADAIX

01:42 Abbey Capital Futures Strategy ABYIX

Jason Kephart: It’s only August, but with all the twists and turns in the market, we wouldn’t blame you for feeling like you’ve already aged a year. Stocks and bonds have held up surprisingly well so far, but with signs of an economic slowdown appearing more frequently and a market increasingly driven by just a handful of AI giants, some investors may be thinking about how to shore up their portfolios as summer winds down.

One way to make your portfolio more resilient in uncertain times is diversification. That’s easier said than done, though. Fortunately, we’ve done the hard part for you by continuously evaluating liquid alternative funds. Here are three that offer that elusive combination of positive expected returns and low correlations to both stocks and bonds.

First, there’s BlackRock Global Equity Market Neutral. This fund is designed to deliver steady returns regardless of market direction by taking both long and short positions across thousands of global companies. Backed by BlackRock’s extensive resources, the team combines advanced data and machine learning with human judgment to navigate fast-changing markets. They’ve recently increased leverage to boost return potential, which does add risk, but the results so far have been encouraging.

Next up is AQR Diversified Arbitrage. While the name might sound complex, the strategy is straightforward. It looks for pricing inefficiencies in areas like mergers, convertible bonds, and corporate events. By spreading investments across many small positions, the fund aims to reduce risk even as it uses leverage to enhance returns. The team’s flexible approach lets them adjust the portfolio mix to capture the best opportunities as markets evolve. This careful balance of research and risk management makes it a strong choice.

And finally, there’s Abbey Capital’s Futures Strategy, which offers exposures to managed futures, a strategy that performed well in 2022 but has faced challenges amid choppier markets recently.

Abbey’s fund takes a multimanager approach, combining trend-following with other trading styles like global macro and short-term reversals. This mix helps smooth out volatility and reduce the risk of large swings common with single-strategy managed futures. With a long history and deep industry relationships, Abbey’s experienced team carefully selects and manages its subadvisors to build a diversified portfolio.

In a year that’s been anything but predictable, these liquid alternatives can offer a way to strengthen and stabilize a portfolio.

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Jason Kephart https://www.morningstar.com/people/jason-kephart

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