One index, called The Wilshire Liquid Alternative Index, aims to deliver a broad market measure for the performance of diversified liquid alternative investment strategies that are implemented in mutual fund structures. The other index, known as the Wilshire Focused Liquid Alternative Index, embeds screening criteria designed to help firms build and monitor investable liquid alternative products in other formats, such as exchange-traded funds (ETFs).
These new indices leverage the intellectual capital of two distinct Wilshire business units—Wilshire Funds Management and Wilshire Analytics. Wilshire Funds Management advises on over $130 billion in assets, including traditional and alternative investment strategies. Wilshire Analytics is the technology foundation of Wilshire and creator of the Wilshire 5000 Total Market Index.
Alternative investment strategies are now implemented through more liquid structures in the aftermath of the global financial crisis, the firm explains. Investors have sought enhanced diversification and downside protection with a heightened emphasis on liquidity and transparency (see “Considering the Hedge”).
Wilshire estimates that the number of liquid alternatives strategies available in the marketplace has increased nearly 500% in recent years, from 75 investable options at the end of 2008 to 450 products in the mutual fund space alone, as of June 2014. But even as liquid alternatives have grown, evaluating the performance of these funds remains a serious challenge, according to Wilshire Funds Management President Jason Schwarz.
“Alternative investments are inherently designed to behave differently than traditional asset classes, so comparing them to well-established, long-only indices is counterintuitive,” he explains. “Hedge fund indices are not a suitable proxy either, as their constituents may access more illiquid investments or deploy greater levels of leverage than is permissible under the regulations of the Investment Company Act of 1940.”
The indices draw upon the Wilshire Manager Research group’s in-depth analysis and categorization of all available liquid alternative mutual funds in the marketplace. Each liquid alternative mutual fund is classified as an equity hedge, event-driven, global-macro, relative-value or multi-strategy fund. The Wilshire Liquid Alternative Index methodology combines these strategy groups to ensure both style diversification and market representation.
Constituent mutual funds for the Wilshire Focused Liquid Alternative Index are screened based on additional criteria, including longevity of track record, correlation to equities and fixed income, and assets under management.
“Developing an appropriate index for a quickly evolving market demands finding the right partner to lend market expertise, as well as distribution capabilities,” says Cecilia Loo, president of Wilshire Analytics.
More information is available here.
— Matthew Miselis