Liquid alternative investment

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Liquid alternatives are investment strategies offered through mutual funds, ETFs, and closed‑end funds that trade daily and aim to provide diversification beyond traditional stocks and bonds. They’re often called 40 Act funds because they follow rules set by the 1940 Investment Company Act.

These funds grew quickly after 2009, with launches tripling through 2013. Retail investors are attracted to the potential for growth with more liquidity than hedge funds offer. The rise of liquid alts has also changed the investment industry, blurring the line between hedge funds and mutual funds and creating new competition and tools for advisors and investors. In 2014, the SEC signaled renewed regulatory scrutiny of the largest products in this area.

Asset growth was strong in the early 2010s, rising from about $124 billion in 2010 to roughly $310 billion in 2014. Growth slowed afterward: in 2015, only about $85 million was added, and 31 liquid-alternative funds closed. The performance of liquid alts in the 2010s was weak, averaging about 1.66% per year after fees. Since 2009, about 453 funds have been created, with around 153 still operating in 2021.