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Fund Times

Liquid Alternatives Aren't Watered Down

Multistrategy alternative managers weigh in on the pros and cons of using mutual funds to access hedge fund-like returns.

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Liquid alternative mutual funds have garnered plenty of attention, both positive and negative, since they started proliferating in the aftermath of the financial crisis. One thing that is potentially misunderstood about the funds is just how well they can deliver similar returns as hedge funds given the extra constraints of the mutual fund structure, particularly liquidity and leverage, compared with less-regulated hedge funds. Three multistrategy alternative mutual fund managers tackled the question at the 27th annual Morningstar Investment Conference in Chicago on Thursday.

"The vast majority of hedge fund strategies can be run in mutual funds with little or no tracking error in a mutual fund," said David Kupperman, co-portfolio manager of Neutral-rated  Neuberger Berman Absolute Return Multi-Manager (NABIX). His fund allocates to a variety of hedge fund strategies, such as long/short equity, event-driven, and long/short credit, by hiring hedge fund managers as subadvisers. Kupperman and his team will typically only hire hedge fund managers that don't need to alter their strategy to fit into a mutual fund.

Jason Kephart does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.