Review & Outlook

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Liquid Alternative Update: The Fund that Never Goes Up

29 May, 2014 by Ben O'Brien in Commentary

In several recent posts we have raised concerns with the growing trend of so-called Liquid Alternatives, mutual funds that are designed to act like hedge funds. A great post today by blogger Josh Brown of the Reformed Broker nails the problems with “Liquid Alts” on the head:

It was early 2011 and they were pushing this Dr. Andrew Lo vehicle called ASG Diversifying Strategies Fund. The idea what that Dr. Lo, perhaps one of the most brilliant quantitative scientists and academicians in finance(MIT, Harvard, all kinds of awards, PhDs out the ass, etc), would be incorporating a variety of approaches to manage the fund using all asset classes, derivatives and trading methodologies that he and his team saw fit to apply. As the strategies were explained to me, I nodded as though I understood – but it was Greek, locked in a black box, dumped into a river, in the middle of the night, as far as I was concerned.

What actually did happen was this: Andy Lo, maybe one of the smartest men in the history of finance, managed to invent a product that literally cannot make money in any environment. It’s an extraordinarily rare accomplishment; I don’t think you could go out and invent something that always loses money if you were actually attempting to.


This fund is of course an extreme case, but its lack of transparency, high fees and poor and unpredictable performance are common problems with Liquid Alts. Brown goes on to explain why the high and/or hidden fees make these sorts of funds highly attractive to the brokers who sell them. Click here for the whole article which is worth reading.