Three out of every four alternative mutual funds launched in the past decade are dead. This isn’t hyperbole. Morningstar’s Jeffrey Ptak has shown that of 1,345 “liquid alts” funds available to US investors at the start of 2015, only 341 survive today.
More than 1,000 have been liquidated or merged away — a failure rate that should give policymakers pause.
The statistic matters here in Britain because the Government and the Financial Conduct Authority are opening the door to similar products. The Leeds Reforms, announced in July by the chancellor, confirmed the direction of travel: wider access to alternative strategies and illiquid assets for ordinary investors.
Before advisers nod this through, it’s worth pausing on what history tells us.
What are “liquid alternatives”?
In the US, an alternative mutual fund — sometimes branded a “liquid alternative” — is a regulated fund that ventures outside the traditional stock-and-bond mix.
Strategies include long/short equity, market neutral, managed futures, arbitrage, commodities and private credit. The attraction is familiar: hedge fund–style diversification, daily liquidity and retail-grade oversight.
The Leeds Reforms confirmed the direction of travel: wider access to alternative strategies and illiquid assets for ordinary investors
In the UK, the menu looks a little different.
We have UCITS “liquid alts”, which use derivatives to mimic hedge fund exposures but offer daily dealing. We now have Long-Term Asset Funds (LTAFs), designed for private markets with notice periods and dealing limits. And we have closed-ended investment trusts, which are exchange-listed but prone to trading at big discounts just when liquidity is most prized.
It all sounds innovative. But the wrapper is less important than the record.
The US experience
Liquid alts boomed after the global financial crisis. Between 2009 and 2014, investors poured $117bn into these funds. In 2014 alone, 302 new alt funds launched. Only 54 remain. Most collapsed under the weight of their own promises.
Ptak’s analysis shows why. Many funds charged high fees and delivered little diversification benefit. Investors who bought in at launch and fled after disappointment compounded the damage through poor timing — buying high, selling low and underperforming even the funds themselves.
When a sector gets crowded fast, history suggests disappointment is not far behind
As Ptak put it, “The more rhapsodic the sales pitch, the more you should plug your ears.” The boom in launches and the rush of investor money were themselves red flags. When a sector gets crowded fast, history suggests disappointment is not far behind.
It’s advice that UK financial advisers should pin above their desks.
The UK policy push
The government’s case is clear enough. Ministers want more capital flowing into private markets to support growth, jobs and “patient capital”. Pension schemes are being nudged towards illiquids. The Leeds Reforms go further, easing the regulatory path for retail investors to put money into these funds, with talk of LTAFs becoming Isa-eligible in due course.
Yet the risks are just as clear. LTAFs can impose gates or queues in stressed markets. UCITS liquid alts rely on complex derivatives whose behaviour is rarely obvious to end investors. Investment trusts bring an extra layer of market-price volatility, often at the worst time.
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At the same time, parts of the consumer-protection framework are being pared back. Changes to redress and ring-fencing mean investors could face thinner safeguards if things go wrong. That makes the adviser’s role more, not less, critical.
A sensible test
So, how should advisers approach these products? A few ground rules help.
Evidence, not anecdotes. Judge funds against simple benchmarks like a 60/40 portfolio, net of all fees, over full cycles — not cherry-picked crisis windows.
Honesty on liquidity. For LTAFs, model cash needs under stress. For investment trusts, model the effect of discounts widening.
Full-cost accounting. Include all layers of charges — management, performance, transaction, financing, platform — and compare them with the 0.1–0.2% cost of a plain index fund.
Behavioural guardrails. Set out in advance why the allocation exists and under what conditions you’ll hold. Without discipline, clients will repeat the liquid-alts cycle of buying at the top and bailing at the bottom.
Where this is heading
We’re likely to see more movement on tax treatment, Isa eligibility and pension defaults for illiquids. Distribution will follow. And if history repeats, the sales pitch will grow loudest just as expected returns are being arbitraged away.
Wrappers may survive longer this time, but the economics of high fees, hidden risks and awkward liquidity have not changed
The last time “new diversifiers” were sold hard to retail investors, the graveyard filled quickly and ordinary savers were left poorer. Wrappers may survive longer this time, but the economics of high fees, hidden risks and awkward liquidity have not changed.
If private markets are as good as their backers claim, they should stand up to the simplest test: delivering returns, net of costs, that justify their place beside low-cost public markets.
Until that case is made, caution is not cynicism. It’s common sense.
Robin Powell is a freelance journalist, consumer advocate and editor of The Evidence-Based Investor
