Even the most diverse portfolios In 2022 they took their lumps, but one corner of the market is ending in the year liquid alternative funds. The S&P 500 has lost nearly 20% this year, and bond yields have surged as prices have fallen. Reflecting a 60/40 portfolio allocation between stocks and bonds, the iShares Core Growth Allocation ETF (AOR) has invested 16 percent through 2022. The story is different for the so-called Liquid Alt. These mutual funds and exchange-traded funds offer investors some diversification — and, in a rough year like this one, a chance to capture some of the gains. “What we’ve seen over this period is that more people are starting to see the value in liquid alts as a diversifier in their overall portfolio,” said Shana Sissel, president and CEO of BanRion Capital Management. Among the top winners in the liquid alts space was the AQR Managed Futures Strategy HV Fund (QMHIX), which rose 36 percent in 2022. Arrow’s Managed Futures Strategy Fund ( MFTFX ) has jumped 21%, while the AGFiQ US Market Neutral Anti-Beta Fund ( ( BTAL ) is up 18% this year. Investors should resist the urge to treat these offerings as mere business, though. Liquid alts can involve significant costs and complexity for investors using them, and they don’t always deliver blockbuster performance. “Once you decide you want one of these in your portfolio, you can’t give it time and just walk away,” said Simon Scott, director of global manager research at Morningstar. Different flavors of alts It’s been a strong year for a certain flavor of alts: strategic trend funds, which use long-short strategies and a variety of assets, including currencies and commodities. This includes the AQR Managed Futures Strategy HV 1 fund, which invests in various futures contracts, including those linked to equity indices and commodities. These types of funds use trend-following and price-momentum strategies, and have benefited from trends in commodity prices and currencies this year, Scott said. Other alternative funds aim to manage the downside risk with options, but also provide an opportunity for appreciation. For example, the Core Alternative ETF (CCOR), which invests in a combination of stocks and options, is up 1.8% in 2022. From now on,” Sissel said. She suggested investors consult a financial advisor when dealing with these funds. Another issue is deciding how much of your portfolio should go into these funds. Sissel recommends allocating up to 20% in liquid options. This might mean taking 80% of a $1 million portfolio and investing it 60/40 in stocks and bonds and the remaining 20% in liquid options. Don’t Forget Performance and Fees Investors need to not only know which alternative fund best suits their long-term goals, but also monitor their expenses. Because the strategies use margin and derivatives, expense ratios for liquid option offerings can exceed 1%, increasing the fund’s costs. Investors also need to know how these strategies have fared in different markets. Consider how Arrow’s managed futures strategy fund is up 21% in 2022, but was essentially flat last year. It lost 4.1 percent in 2020. It can be tempting to underwrite these options when they’re short, but if investors want to hedge the answer for the long term, performance variance is part of the package. Morningstar Scott points out three key points for investors to consider: Why are you considering options? Which strategy works best for an individual set of circumstances? Can you stick with it? “It’s got to be a structural mindset. You’ve got it in a smooth way for a long time. Alts aren’t just for Christmas, they’re for life,” Scott said.