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Shrinking Alts Universe Is a Positive for Investors

Jason Kephart, CFA

Jason Kephart: The culling of liquid alternatives funds is under way. For the second straight year, we are on pace to see more liquid alternative funds shuffle off this mortal coil than be launched. Through the first nine months of 2017, 47 alternative mutual funds have either liquidated or been merged away, and only 34 new funds have been launched. In 2016, 74 alts funds were liquidated or merged away, while 50 new funds were launched. In total, the number of alts funds has fallen from 582 in 2015 to 539 today, and assets are down slightly from the peak in 2015. 

It's been a stark turnaround for an asset class that saw tremendous growth in fund launches and assets after the financial crisis. For the most part, investors should view the shrinking alts universe as a positive. Many of these funds that are closing failed to gain traction either because of poor performance, unattractive fees, or focusing on too niche of a strategy for most investors. Having fewer unattractive options to comb through should make the liquid alternatives universe a more interesting proposition for investors. Focusing on funds with lower fees from firms that have a history of good stewardship should help investors avoid funds that have a high probability of ending up in the elephant graveyard of alts.