Key Takeaways
- • Liquid alternatives funds delivered +0.5% average returns in 2022 while the Morningstar Global Markets index declined 17.9% and the Global Core Bond index fell 11.4%, demonstrating renewed value after years of underperformance relative to traditional indices.
- • Systematic trend funds emerged as the top-performing alternative category with average gains of 10% in 2022, representing the third-largest alternative strategy segment with $27 billion in assets under management.
- • Performance dispersion within alternative fund categories was extreme in 2022, with individual fund returns ranging from 2% to 29% depending on manager quality and strategy implementation, underscoring the importance of fund selection within the sector.
- • Francesco Paganelli, manager research analyst at Morningstar, attributed the sector's recovery to demonstrating that liquid alternatives "can be a complement to a diversified portfolio and provide a differentiated exposure relative to stocks and bonds," reversing sentiment after years of underperformance by major players.
- • Liquid alternatives proved they can generate returns independent of interest rate movements, credit spreads, and equity market direction—addressing the core thesis behind the strategy category after years of skepticism from institutional investors.
Summary
Liquid alternatives have regained institutional investor attention following a strong 2022 performance cycle that vindicated their core investment proposition after years of sector-wide skepticism. The average alternatives fund (excluding event-driven and arbitrage strategies) returned 0.5% in 2022, according to Morningstar Direct data, while traditional equity and fixed income benchmarks suffered substantial declines. The Morningstar Global Markets index fell 17.9% and the Morningstar Global Core Bond index declined 11.4%, highlighting liquid alternatives' defensive characteristics during a volatile period for conventional asset classes.
The sector's rehabilitation follows a prolonged period of underperformance that had damaged investor confidence. As Francesco Paganelli, manager research analyst at Morningstar, noted, "Some of the largest players have not delivered on their promises throughout the years that has weighed on the entire sector." The 2022 performance cycle demonstrated that liquid alternatives could fulfill their intended role within diversified portfolios by generating returns uncorrelated to stocks and bonds, employing complex strategies designed to produce uncorrelated returns regardless of market direction.
Systematic trend funds emerged as the standout performer among alternative categories, averaging 10% returns in 2022. This strategy segment, the third-largest within alternatives with $27 billion in assets, benefited from the volatile and directional market environment that characterized the year. James de Bunsen, multi-asset portfolio manager at Janus Henderson, confirmed that liquid alternatives demonstrated they could generate returns "not dependent on benign movements in rates, spreads or equity markets." However, de Bunsen emphasized that investor selection of individual funds proved critical, noting that his own alternatives portfolio generated returns spanning from 2% to 29% depending on specific fund implementation.
The extreme performance dispersion within alternative sectors underscored the sector's heterogeneity, with yields and equity market rotations creating divergent outcomes across different strategy implementations. This outcome suggests that while liquid alternatives have restored credibility as a diversification tool, future investor success will depend heavily on rigorous manager selection and strategy-specific analysis rather than broad sector allocation decisions.
The sector's rehabilitation follows a prolonged period of underperformance that had damaged investor confidence. As Francesco Paganelli, manager research analyst at Morningstar, noted, "Some of the largest players have not delivered on their promises throughout the years that has weighed on the entire sector." The 2022 performance cycle demonstrated that liquid alternatives could fulfill their intended role within diversified portfolios by generating returns uncorrelated to stocks and bonds, employing complex strategies designed to produce uncorrelated returns regardless of market direction.
Systematic trend funds emerged as the standout performer among alternative categories, averaging 10% returns in 2022. This strategy segment, the third-largest within alternatives with $27 billion in assets, benefited from the volatile and directional market environment that characterized the year. James de Bunsen, multi-asset portfolio manager at Janus Henderson, confirmed that liquid alternatives demonstrated they could generate returns "not dependent on benign movements in rates, spreads or equity markets." However, de Bunsen emphasized that investor selection of individual funds proved critical, noting that his own alternatives portfolio generated returns spanning from 2% to 29% depending on specific fund implementation.
The extreme performance dispersion within alternative sectors underscored the sector's heterogeneity, with yields and equity market rotations creating divergent outcomes across different strategy implementations. This outcome suggests that while liquid alternatives have restored credibility as a diversification tool, future investor success will depend heavily on rigorous manager selection and strategy-specific analysis rather than broad sector allocation decisions.
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