Liquid alternatives have opened up a new dimension in portfolio construction — but Toby Watson is clear that accessibility alone is not a reason to use them.
The growth of liquid alternative strategies has given a much wider range of investors access to return streams that were once the exclusive domain of large institutional portfolios. Yet accessibility has also brought confusion — not every strategy that calls itself a liquid alternative delivers what investors expect, and the gap between promise and reality can be significant. Toby Watson, whose career at Goldman Sachs International included direct exposure to the most sophisticated alternative strategies in global markets, brings the analytical rigour needed to distinguish genuine value from marketing noise.
Liquid alternatives have become one of the more discussed categories in modern portfolio construction — attracting both genuine interest and a fair amount of scepticism from experienced investors. Toby Watson, a partner at Rampart Capital, has spent considerable time assessing how liquid alternative strategies can most effectively contribute to a diversified portfolio, drawing on a career that exposed him to alternative investment structures across multiple market cycles and geographies. His perspective is grounded in analytical discipline rather than category enthusiasm — focused on what a strategy actually does in a portfolio, how it behaves under stress, and whether the return stream it offers is genuinely distinct from what conventional investments already provide.
What Liquid Alternatives Actually Are — and What They Are Not
The term “liquid alternatives” covers a wide and somewhat heterogeneous range of strategies. What they share is a structural characteristic: they are packaged in vehicles — typically UCITS funds or similar regulated structures — that offer daily or weekly liquidity, transparent pricing and regulatory oversight comparable to conventional mutual funds. In this respect, they represent a genuine democratisation of strategies that were previously accessible only to institutional investors or those meeting the eligibility thresholds for hedge fund investment.
What they do not share is a common investment approach. Under the liquid alternatives umbrella you will find equity long/short strategies, global macro funds, managed futures programmes, market neutral approaches, volatility strategies and multi-strategy vehicles that combine several of these in varying proportions. Each has a distinct return profile, risk characteristic and role within a portfolio. Treating them as a single asset class — as some investors do — is a mistake that tends to produce allocations that are poorly understood and inadequately monitored.
Toby Watson‘s view is that the starting point for any assessment of liquid alternatives must be a clear understanding of what specific role a given strategy is intended to play in the portfolio. Is it providing diversification from equity risk? Generating returns that are uncorrelated with both equities and bonds? Reducing overall portfolio volatility? Each of these objectives calls for a different type of strategy — and for Toby Watson, evaluating whether a strategy is fulfilling its intended role requires more than looking at recent performance numbers.
How should investors assess whether a liquid alternative strategy genuinely adds value?
The most important question is whether the strategy’s return stream is genuinely uncorrelated with the investor’s existing portfolio — not in theory, but in practice, and particularly under stress conditions. Toby Watson’s experience at Goldman Sachs International, where he worked alongside some of the most sophisticated users of alternative strategies in global finance, reinforced a key lesson: correlations that appear low in normal conditions often converge during market crises, precisely when diversification is most needed. A rigorous assessment of a liquid alternative strategy must therefore stress-test its correlation profile across different market environments, not just measure it against the most recent period of calm.
Toby Watson on the Main Categories and Their Portfolio Roles
For Toby Watson, the liquid alternatives universe is most usefully understood through the lens of what each strategy type is actually trying to deliver — and whether it does so consistently.
- Managed futures and trend-following strategies have one of the longest track records in the alternatives space. They seek to capture persistent price trends across a wide range of markets — equities, fixed income, commodities and currencies — using systematic, rules-based approaches. Their most attractive characteristic, from a portfolio construction perspective, is their tendency to perform well during extended market dislocations. Toby Watson highlights 2022 as a particularly instructive example: many trend-following strategies delivered strongly positive returns at a time when conventional diversification failed across almost every asset class simultaneously.
- Global macro strategies take discretionary or systematic positions across currencies, rates, commodities and equities based on macroeconomic analysis. Their return profile is less predictable than systematic trend-following, reflecting the degree to which outcomes depend on the quality of the manager’s macro judgement. Toby Watson notes that the best global macro managers are rare and their capacity limited — meaning that genuine access to top-tier strategies is not always straightforward for private investors.
- Equity long/short strategies aim to generate returns by holding long positions in stocks expected to outperform and short positions in those expected to underperform. Their net equity exposure varies considerably across strategies and managers, and this variation has a significant impact on how much genuine diversification they provide. Toby Watson emphasises that investors need to understand the net exposure of any long/short strategy before assuming, it will behave differently from a conventional equity allocation in a downturn.
Two Dimensions of Fit That Investors Often Overlook
When assessing whether a liquid alternative strategy belongs in a portfolio, Toby Watson consistently returns to two dimensions that are frequently underweighted in the evaluation process:
- Cost relative to return: Liquid alternatives are typically more expensive than passive equity or bond funds. The question is whether the additional cost is justified by a return stream that genuinely improves the portfolio’s risk-adjusted performance — and that assessment requires realistic expectations rather than reliance on back-tested or cherry-picked data
- Behavioural fit: Liquid alternative strategies can behave in ways that feel counterintuitive during certain market environments — delivering losses when equities are rising strongly, or performing well during periods of stress that feel alarming. Investors who are not prepared for this behaviour may reduce or eliminate their allocation at precisely the wrong moment
Getting both dimensions right requires the kind of careful, experience-based analysis that Toby Watson brings to every portfolio construction decision. His years at Goldman Sachs International, navigating complex alternative structures across multiple market cycles, give him a perspective that goes well beyond what most practitioners in this space can offer. In a market where the liquid alternatives space continues to expand rapidly, that analytical discipline is more valuable than ever.
