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Liquid Alternatives


Liquid Alternatives are a class of investment strategies that are designed to provide diversification and risk-adjustment benefits similar to traditional hedge funds, but within a mutual fund structure. They aim to reduce volatility and enhance returns. These alternatives are called “liquid” because they can be easily bought and sold like standard mutual funds.


The phonetic pronunciation of “Liquid Alternatives” is: /’li:k.wɪd/ /ɔ:l.tɚ.’neɪ.tɪvz/

Key Takeaways

  1. Diversification opportunities: Liquid Alternatives provide investors with the opportunity to diversify their portfolio. By investing in Liquid Alternatives, investors can gain exposure to different asset classes, strategies, and risk profiles, which are not usually accessible in traditional investment strategies.
  2. Risk management: Liquid Alternatives are designed to help investors manage risk effectively. They typically have low correlation with traditional asset classes, such as stocks and bonds, which can help in reducing portfolio volatility and shielding against market downturns.
  3. Liquidity: As the name suggests, Liquid Alternatives offer daily liquidity. This is a significant advantage over traditional alternative investments, such as hedge funds, private equity, and real estate, which usually lock up investors’ capital for extended periods.


Liquid Alternatives are an important concept in business/finance as they provide investors with an opportunity to diversify their portfolio while also enhancing risk-adjusted returns. They offer exposure to alternative investment strategies that are typically available only to institutional or high net worth investors, whilst maintaining liquidity similar to traditional investments such as equities or bonds. Moreover, liquid alternatives can act as a hedge in volatile markets, reducing investment risk due to their low correlation with traditional asset classes. Thus, this investment option can be an efficient tool for mitigating market risks and enhancing overall portfolio performance.


Liquid alternative investments, or liquid alts, serve a vital role in finance and business, particularly in portfolio management and diversification efforts. The purpose of these investments is to provide individual and institutional investors with access to alternative investment strategies such as private equity, hedge funds, managed futures, real estate, commodities and derivative contracts through mutual funds or exchange traded funds (ETFs). These strategies, which traditionally have been reserved for large institutions or wealthy individuals due to high minimum investment requirements, stringent regulations, and a lack of liquidity, are now accessible to a broader range of investors via liquid alternatives.Liquid alts contribute greatly to risk management and portfolio optimization. They offer the potential to improve risk-adjusted returns by allowing investors to diversify their portfolios beyond traditional investments, reducing the potential for severe losses during periods of market turbulence. These investments, given their distinct characteristics, tend not to move directly in line with traditional stock or bond markets, thereby providing a cushion when such markets face a downturn. This low correlation to traditional markets, along with their high liquidity that enables investors to rapidly adjust their holdings in response to changing market conditions, make liquid alternatives an attractive tool for portfolio construction and risk management.


Liquid Alternatives are financial instruments that aim to replicate hedge fund strategies using a structure that allows for daily liquidity. Here are three real-world examples of Liquid Alternatives:1. Mutual Funds: Certain types of mutual funds, such as those that employ long/short equity strategies, can be considered Liquid Alternatives. An example could be the BlackRock Global Long/Short Equity Fund, which seeks to achieve positive absolute returns regardless of market conditions, similar to a hedge fund strategy.2. Exchange-Traded Funds (ETFs): Some ETFs can also be considered Liquid Alternatives because they provide daily liquidity and often use strategies similar to those employed by hedge funds. The ProShares RAFI Long/Short ETF is an example of a Liquid Alternative that employs a long/short strategy consistent with those seen in the hedge fund space.3. Funds of Hedge Funds: These are actively managed portfolios of hedge funds that aim to provide investors with exposure to a wide variety of alternative investment strategies. However, some of these have transformed their structure to provide more liquidity, thereby qualifying as Liquid Alternatives. The Blackstone Alternative Multi-Strategy Fund is an example of this, utilizing a diverse range of strategies and sub-advisors while being incorporated under the structure of a mutual fund to allow for daily liquidity.

Frequently Asked Questions(FAQ)

What are Liquid Alternatives?

Liquid Alternatives refer to different investment strategies usually used by hedge funds and made available to a wider range of investors via liquid vehicles such as mutual funds and exchange-traded funds.

Are Liquid Alternatives different from traditional investments?

Yes, Liquid Alternatives are often correlated less with traditional stock and bond markets. Their unique approach can provide diversification, offset exposures in other areas of a portfolio or used as a potential source of excess returns.

How can Liquid Alternatives diversify my portfolio?

As they tend to behave differently than traditional stocks and bonds, by adding them to your portfolio, you can potentially enhance portfolio diversity, reduce risk and increase returns.

What types of Liquid Alternatives exist?

There are several types including but not limited to: equity long/short, managed futures, global macro and market neutral strategies.

Who should invest in Liquid Alternatives?

Liquid Alternatives can be suitable for investors looking for diversification in their portfolio and those who need daily liquidity in their investment while still achieving capital appreciation.

Are Liquid Alternatives expensive to invest in?

While the cost of investing in Liquid Alternatives can be higher than traditional investments due to their complexity, potential for higher returns and diversification benefits may be beneficial for certain investors.

Are Liquid Alternatives risky?

Like all investments, Liquid Alternatives come with risks. However, they can be less volatile than traditional investments due to their unique strategies and potential for diversification. Some risks specific to these types of investments include strategy risk, management risk and liquidity risk.

Where can I invest in Liquid Alternatives?

Liquid Alternatives are often available through financial advisors and brokers, or through online trading platforms. Various mutual and exchange-traded funds offer a range of Liquid Alternative strategies.

How can I track the performance of my Liquid Alternatives investments?

Performance can usually be tracked through your investment platform or provider’s website, or potentially through financial news sources. Investors should carefully read fund literature to understand each investment’s specific reporting structure.

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