Stocks closed out a strong year with a rocky final week as light trading volume magnified market movements. For the month of December, the Wilshire 5000 Total Market Index℠ finished virtually flat, down -0.05%, while the Barclays U.S. Aggregate Index was modestly positive, finishing up 0.09%. During the same period, the Wilshire Liquid Alternative Index, which provides a representative baseline for how the broad liquid alternative investment category performs, was down -0.85%, as all component sub-categories delivered negative returns during December. For the year, the Wilshire Liquid Alternative Index finished up 1.55%, according to Wilshire Associates Incorporated (Wilshire®), a diversified global financial services firm.

“2014 marked an important coming of age for liquid alternative mutual funds as their performance, measured by the Wilshire Liquid Alternative Index family, outperformed their hedge fund index counterparts across the board,” commented Jason Schwarz, president of Wilshire Funds Management. “The fact that liquid alternative funds, which are sometimes referred to as watered-down versions of hedge fund strategies, outpaced their private fund counterparts in 2014 bodes well for the average investor and supports continued growth of liquid alternatives in a broad range of investor portfolios.”

The Wilshire Liquid Alternative Equity Hedge Index, which includes directional long-short equity and market neutral mutual funds, was down -0.42% for the month and finished the year up 2.14%. During 2014, liquid hedged equity strategies lagged long-only equities, but outperformed the HFRX Equity Hedge Index, which is comprised of investable hedge funds, by more than 70 basis points.1 Mutual fund versions of equity hedge strategies tend to be more U.S.-focused, whereas private hedge funds often invest more globally. Given that U.S. equities outperformed the rest of the world by a healthy margin in 2014, liquid alternatives got a performance boost relative to hedge funds.

After three consecutive years of negative returns, global macro strategies regained traction in 2014 with systematic strategies, commonly known as managed futures, performing particularly well. Heightened geopolitical risks, U.S. dollar appreciation and plunging oil prices created a strong environment for many global macro managers focused on trend following. Amidst this backdrop, the Wilshire Liquid Alternative Global Macro Index, which includes all forms of macro mutual fund strategies, ended the month down -0.20%, but finished 2014 up 6.56%, outperforming the HFRX Macro/CTA Index by 100+ basis points for the year. In general, liquid alternative managers are able to more closely replicate their global macro hedge fund peers due to the liquidity of the instruments deployed, which tend to be currencies, rates, and equities.

The Wilshire Liquid Alternative Event Driven Index, which includes credit, merger arbitrage and special situations funds, ended both the month and the year in negative territory, down -0.82% and -0.99%, respectively. The Wilshire Event Driven Index outperformed the HFRX Event Driven Index by more than 300 basis points for the year primarily because event-driven hedge funds tend to invest lower down the capital structure and dabble in lower credit quality investments, which underperformed relative to higher credit quality investments. In addition, many event-driven hedge funds were heavily exposed to some notable deals in 2014 that broke, leaving them with large realized losses. Liquid alternative funds did not have the same levels of exposure to many of these deals.

The Wilshire Liquid Alternative Relative Value Index, which includes credit, convertible arbitrage and volatility funds, finished the month down -1.10% and the year up 1.04%, outperforming the HFRX Relative Value Arbitrage Index by more than 400 basis points. Thematically, the story was much the same for relative value and event-driven liquid alternatives managers in 2014 as the bulk of credit’s performance in 2014 was due to interest rate exposure. Hedge fund managers that tried to hedge duration in anticipation of rising rates took on more credit spread risk and ultimately underperformed relative to mutual funds.

Finally, the Wilshire Liquid Alternative Multi-Strategy Index, which includes mutual funds that allocate to a broad range of alternative sub-categories, posted a return of -1.59% for December and a full-year return of 0.61%.

WILSHIRE LIQUID ALTERNATIVE INDEX FAMILY VS. INVESTABLE HEDGE FUND INDEX COUNTERPARTS

 

Broad Hedge Fund/Liquid Alternative Market

 

Dec-14

2014

Wilshire Liquid Alternative Index -0.85% 1.55%
HFRX Global Hedge Fund Index -0.75% -0.58%
Liquid Alternative Difference -0.10% 2.13%

Equity Hedge

 

Dec-14

2014

Wilshire Liquid Alternative Equity Hedge Index -0.42% 2.14%
HFRX Equity Hedge Index -0.54% 1.42%
Liquid Alternative Difference 0.12% 0.72%

Event Driven

 

Dec-14

2014

Wilshire Liquid Alternative Event Driven Index -0.82% -0.99%
HFRX Event Driven Index -0.47% -4.06%
Liquid Alternative Difference -0.35% 3.07%

Global Macro

 

Dec-14

2014

Wilshire Liquid Alternative Global Macro Index -0.20% 6.56%
HFRX Macro/CTA Index 0.34% 5.24%
Liquid Alternative Difference -0.54% 1.32%

Relative Value

 

Dec-14

2014

Wilshire Liquid Alternative Value Index -1.10% 1.04%
HFRX Relative Value Arbitrage Index -2.04% -3.14%
Liquid Alternative Difference 0.94% 4.18%

Multi-Strategy

 

Dec-14

2014

Wilshire Liquid Alternative Multi-Strategy Index -1.59% 0.61%
HFRX Global Hedge Fund Index -0.75% -0.58%
Liquid Alternative Difference -0.84% 1.19%

Source: Wilshire®, HFRX

About Wilshire Associates

Wilshire Associates, a leading global, independent investment consulting and services firm, provides consulting services, analytics solutions and customized investment products to plan sponsors, investment managers and financial intermediaries. Its business units include, Wilshire Analytics, Wilshire Consulting, Wilshire Funds Management and Wilshire Private Markets.

The firm was founded in 1972, providing revolutionary technology and acting as an early innovator in the application of investment analytics and research to investment managers in the institutional marketplace. Wilshire also is credited with helping to develop the field of quantitative investment analysis that uses mathematical tools to analyze market risks. All other business units evolved from Wilshire’s strong analytics foundation. Wilshire developed the Wilshire 5000 Total Market Index and became an early innovator in creating integrated asset/liability analysis/simulation models as well as practical models in risk budgeting through beta and active risk analysis. Wilshire has grown to a firm of more than 300 employees serving the needs of investors around the world.

Based in Santa Monica, California, Wilshire provides services to clients in more than 20 countries representing more than 500 organizations with assets totaling approximately US $7 trillion.* With ten offices on four continents, Wilshire Associates and its affiliates are dedicated to providing clients with the highest quality counsel, products and services. Wilshire® and Wilshire 5000® are registered service marks of Wilshire Associates Incorporated. Wilshire 5000 Total Market Index℠, Wilshire US Micro-Cap Index℠, Wilshire US Large-Cap Value Index℠, Wilshire US Large-Cap Growth Index℠, Wilshire US Small-Cap Growth Index℠ and Wilshire US Small-Cap Value Index℠, Wilshire US Real Estate Securities Index℠ and Wilshire exUS Real Estate Securities Index℠ are service marks of Wilshire Associates Incorporated.

Please visit www.wilshire.com for more information.

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*Client assets are as represented by Pensions and Investments, detailed in P&I’s “Largest Retirement Funds” and P&I’s “Largest Money Managers (U.S. institutional tax-exempt assets)” as of 9/30/12 and 12/31/12, and published 2/4/13 and 5/27/13, respectively.

1 The HFRX Indices are constructed to be investable products, which makes for a more relevant comparison to mutual funds than the HFRI Indices which are not investable.