Liquid Absolute Return Funds: An Alternative to Alternatives?

Abstract

The author presents the first comprehensive study of liquid absolute return funds (i.e., mutual funds that have absolute return targets and at least weekly liquidity) and shows that their higher liquidity compared with traditional hedge funds may be offset, in part, by fees that are generally substantially higher than those of traditional equity or hybrid funds. The author constructs the Liquid Absolute Return Indexes (LARI) as a benchmark against which the performance of individual liquid absolute return funds can be measured. Klement performs factor regressions of these indexes and fi nds that their factor exposures differ materially from those of hedge funds. In the article, he also analyzes the effect of adding liquid absolute return funds to a diversifi ed portfolio of stocks and bonds and investigates whether these instruments can be an alternative to traditional alternative investments, such as hedge funds.