Sumnicht on post: “Madoff’s Revenge: The Rise Of Liquid Alternatives”

By MBA, CFP® - Chief Executive Officer, Vernon C. Sumnicht on June 19, 2014

Vern Sumnicht Response to the recent article posted on

Madoff’s Revenge: The Rise Of Liquid Alternatives

Jun. 13, 2014 1:51 PM ET | Includes: DLR, HCP, TYG
Disclosure: The author is long DLR, HCP, TYG. (More…)


  • The fast-growing new asset class “Liquid Alternatives”, which market hedge fund strategies to small individual investors, often have excessive fees and lack transparency and liquidity.
  • The rise of “Liquid Alts” is the result of failed regulation that expanded access to risky, expensive hedge funds rather than reigning them in after the Madoff scandal.
  • With their high fees, “Liquid Alts” are a bonanza for unscrupulous advisors who have fee-sharing arrangements that are common among broker-dealers and 401k managers.

Read the entire article (along with other comments) here.

Mr. Sumnicht’s comment:

It was more than 5 years ago that I started using the term Liquid Alternatives and decided I should own I’m the CEO at iSectors, LLC, an ETF Investment Strategist, (see I’ve been an investment advisor to HNW clients and institutions for more than 30 years. I was a CTA and CPO so I could use certain futures strategies for my clients for a period of time. Back in 1996 and 1997, I started two hedge fund-of-funds for the purpose of taking some clients’ previously earned profits “off the table” in anticipation of a market correction. I began a series of eight private equity funds for my clients starting in 1997. My point is, I am very familiar with hedge funds, real assets, private equity and a few other “alternative” investments.

I’m aware of the benefits from alternatives (i.e.) less efficient markets offer opportunities for excess returns, low correlation with stock and bond portfolios, etc. I’m also aware of their drawbacks (i.e.) volatility, lack of transparency, record of fraud, large minimum investments, accredited investors only, often a year or more to get withdrawals, K-1 tax reports (always late) and finally, high fees: 1 or 2% annual management and 20%+ of profits, not to mention the additional 1% and 10% at the fund-of-funds level, plus the 1% your advisor is paid means fees could easily total 3-4% annually and 30% of profits. I think most advisors are aware of all the negatives and maybe they’ve been wise not to get their clients entangled in them. I also believe advisors appreciate the potential opportunities alternatives offer.

Bernie Madoff might like to think he’s had an influence on the entire investment and alternatives industry but, he’s really just another Ponzi scheme operator in a long line of other thieves. Bernie Madoff wasn’t a hedge fund manager, most loses came from money invested directly in brokerage accounts invested with his firm. Can anyone even remember the name of a hedge fund that lost money because of an account the fund held with Madoff?

As far as the statement, “Dodd-Frank reforms required hedge funds to register with the SEC for the first time. This was intended to reign in, the lightly regulated, high-risk funds … the result was the opposite of what the regulation originally appeared to do.” It is interesting but, Dodd-Frank didn’t require hedge funds to register with the SEC or any other regulators. According to the Investment Law Group Frequently Asked Questions:

Does a hedge fund need to register with any regulator?
Hedge fund managers are often regulated by the state in which the hedge fund manager conducts business or by the SEC, depending on the manager’s assets under management (known as “AUM”). Hedge funds themselves do not register…

In March 2008 (before Madoff’s arrest in December of 2008) I submitted a paper to the FPA for publishing. The paper wasn’t published, but it did get me invited to speak at the National NAPFA Conference. This conference was (I believe) the first time anyone coined the term “Liquid Alternatives” and associated it with registered securities that were hedge fund strategies, private equity and real assets. A part of the presentation involved the research we did to create our iSectors® Liquid Alternatives Allocation model. The model uses about 30 registered securities about 25% are private equity, 45% hedge strategies and 30% real assets. The types of securities used include mostly ETFs but also include a number of BDCs, MLPs, REITs, one ETN, closed-end funds and a few mutual funds. The average expenses inside the securities held in the iSectors® Liquid Alternatives Allocation model are 1.10% and not one has a front-end, back-end or 12-b1 fee nor do any of them share fees with advisors.

National NAPFA Conference 2008 Sumnicht Speaking EngagementThe presentation was well attended, as you can see in the photo to the left. Based on questions during and after the presentation, advisors were very knowledgeable and interested but, no one mentioned Mr. Madoff or Dodd-Frank.

Advisors, in my opinion, were interested in providing clients the advantages of alternative investments way before Mr. Madoff. The reason liquid alternatives are growing in popularity is because they add value to client portfolios and now most of the negatives associated with the private partnership structure can be eliminated with liquid alternatives. The substantially lower costs, along with the benefits of alternative investments are the simple reasons why liquid alternative investments have gathered interest and are growing quickly.

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