The Derivative Project

Liquid Alts, Wall Street and Media Frenzies that Drive Retirement Investor Behaviors

Liquid Alts, Wall Street and Media Frenzies that Drive Retirement Investor Behaviors

Liquid Alts, Wall Street and Media Frenzies that Drive Retirement Investor Behaviors

The Media Frenzied Push for a “Passive Revolution”.

The ink is hardly dry on the media frenzy that has created the “passive revolution”, where it is necessary to throw the baby out with the bath water and ignore the top performing, low fee active funds that have been generating alpha for decades.  The only thing now worth investing in, according to the media and Wall Street are ETF’s.  They forgot one thing:  data analysis to prove their point.  Consumers are actually worse off with the so-called “passive revolution”, below the index based returns.

The “passive revolution” was Wall Street ‘s answer to their abysmal failure to understand OTC derivatives, excessive leverage and the risks they took to exacerbate the 2008 financial crisis.  Alternatively, they did understand it and breached their fiduciary duty for all those that paid them a fee to manage their assets and let them lose close to 40% in 2010 employer sponsored 2010 Target Date Funds.  ETF’s are easy, a straight-forward profit model and Wall Street has no responsibility for watching the portfolio–they have algorithms to do that.

As investors were fed up with high advisor fees, losses from the financial crisis, Wall Street quickly changed the message:  There is a “passive revolution”, you have been duped by who knows who for years (actually Wall Street) and everyone must now move into ETF’s, that Wall Street or Silicon Valley will package for 25 basis points or more, guaranteeing the retirement investor returns below the index.

Packaged ETF’s, Portfolios, Performance and Holdings are Not Reported to the SEC

Along with the passive revolution, Wall Street’s new business model is a dream.  These “managed accounts” do not have to file holdings or performance with the SEC.  So they have a pass and can just collect their fees with no responsibility for performance.  The Government Accountability Office (GAO) just warned the Department of Labor that employers are putting employee’s funds into accounts without first even looking at the performance.  It is indeed a retirement crisis and it is not a result of the average American not trying to save for their future.

In addition to the guaranteed income on the ETF packages to Wall Street, without any responsibility, they advertise they do not charge trading commissions, however their fine print ADV’s reveal most ETF packagers, such as new Silicon Valley “robo-advisors” are being paid for their order flow and the trades may not be in the best interest of the client.  Whoops.  Senator Levin has concerns, you should too if you have jumped on the passive revolution band wagon.  Your returns after trading costs, rebalancing costs and dark pool trades are simply not reported to the SEC.  You are on your own to really know what your true returns are and after all trading costs, you are far below the lowest cost top performing active managers.

Now that Everyone has been seduced by the Passive Revolution, it is time for Phase II- The Liquid Alt Frenzy

Study on Women and Liquid AltsAn August 2014 “study’ by New York Life’s Mainstay Investments was a good place to start the media frenzy.  First lay the groundwork, which began last summer: ” Ladies just love these liquid alts”–yes, way more than the guys!  Wide spread distribution of a survey by Mainstay Investments, “Investing Outside the Box”, August 13, 2014, here at Yahoo Finance.  Below is a clip from the article, that is PR for new product sales for the army of insurance and financial services firms to sell these very high fee products, which to date have had very poor performance.


Now that media and Wall Street have first established that the ladies just love these “alts” it is time to really push the envelope and get everyone, not just the ladies, on the liquid alts diet.

September 14, 2014 Investment News (Wall Street’s industry daily) reported “For financial advisers and individual investors, the liquid alts space represents a robust, if largely untested, means of diversifying beyond traditional long-only stocks and bonds.”

October 7, 2014 Investment News, “Goldman Sachs strategists say investors hold too much stocks and bonds and need to jack up alternatives allocations”.

October 16, 2014, Reuters reports Goldman Sachs in talks to acquire Index IQ.  Bloomberg also reported on October 20, 2014: “Goldman equity strategists have called liquid alts the “next frontier” for investment managers, predicting that the market for them among individual investors could reach $2 trillion within a decade. Their rationale: Alternatives are 4 percent of retail assets but make up more than 20 percent of institutional allocations. With lower fees on the products and a thirst for new avenues of return among individual investors, Goldman thinks growth could track that of the overall ETF industry.”

Lloyd Blankfein Source, BloombergIndex IQ sells liquid alts ETF’s.  Let’s take a look at how Index IQ’s largest held ETF (QAI) – IQ Hedge Multi Strategy Tracker ETF, according to Bloomberg has performed over the past five years compared to a Not On My Nickel retirement core benchmark balanced fund.  Note that the annual expense ratio of the Index IQ ETF (QAI)  is greater than the actively managed NOMN benchmark balanced fund (PRWCX).

(We do acknowledge that it has been a bull market, but look at how this Index IQ liquid alt ETF (QAI) performed over the last very volatile few weeks)

QAI vs Traditional Balanced Fund





As the chart at the beginning of the article and this chart indicate, this particular liquid alt would be more of a drag on the portfolio, particularly with a 75 basis point expense ratio.

DailyAlts, August 2014 reports “Use of Liquid Alts in Defined Contribution Plans in on the Rise”

Daily Alts wrote in the above article:  …”but up until recently, defined benefit plans had a distinct and unfair advantage in that they could invest in alternative investments, whereas defined contribution plans were largely restricted to traditional stock and bond investments. Thankfully, liquid alternatives have provided a solution to this disparity.”

So how is Wall Street introducing these liquid alts–in Target Date Funds, according to the Daily Alts article linked to above:

Alternatives in Target Date Funds

“According to T. Bondurant French, a CFA with Adams Street Partners, target-date funds are the largest growing segment of the defined contribution plan market today, and they are a good fit with alternative investments. “I don’t see most individual participants having enough expertise or education to make choices on a monthly or quarterly basis between high yield, global fixed income, global equity, hedge funds, commodities, real assets and private equity. But those options do make a lot of sense in a professionally managed strategy like a target-date fund.”

The performance of these Target Date funds to date using alternatives is abysmal- review Blackrock’s NLHAX or John Hancock’s Global Absolute Strategy Fund, a new fund in defined contribution plans, that Morningstar said last July, “Management turnover continues to plague the otherwise promising John Hancock Global Absolute Return Strategies.”

The Dailyalts article stated, “A 2014 PIMCO survey found that 98% of consultants support or strongly support use of alternatives within target-date strategies.”  And who is paying these investment consultants to Target Date Fund investment selections–Wall Street, who make more more selling alternatives.  Are they acting in retirement investors’ best interest?

No, there is absolutely no historical performance or explicit investment strategy that can support this new push for complexity that Yahoo Finance cannot even explain in a paragraph:  here is Yahoo Finance’s strategy profile of Goldman’s potential purchase of alt “Qai.”, that explains “nothing” about QAI’s investment strategy.

“Fund Summary – QAI – From Yahoo Finance
“The investment seeks investment results that correspond generally to the price and yield performance of its underlying index, the IQ Hedge Multi-Strategy Index. The fund is a “fund of funds” which means it invests, under normal circumstances, at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in the investments included in its underlying index, which includes underlying funds. The underlying index consists of a number of components (“underlying index Components”) selected in accordance with IndexIQ's rules-based methodology of such underlying index.”

One then takes a look at the major holding of QAI, high fee ETF, CWB (before 40% portfolio turnover costs, and expense ratio of 40 basis points, that represents 21% of QAI’s holdings, which has also significantly underperformed NOMN’s benchmark balanced funds.  Retirement investors need published performance and defined, understandable investment strategy for their retirement assets, not media hype that benefits Wall Street, who is now pushing into high fee ETF’s to supplement their lost income from low-fee passive approaches.

The largest manager of retirement assets, CALPERS, announced September 15, 2014 it would throw them all out the window. “CalPERS Eliminates Hedge Fund Program in Effort to Reduce Complexity and Costs in Investment Portfolio.”

It is time to give every investor the tools and platform to take charge, before their nest eggs are moved from passive revolution (Phase I -which guarantees performance below the index) to Phase II – liquid alts that really move the performance off the charts, ——yes way below the index, after all fees.