Returns, Diversification, and Liquidity

GMO’s liquid alternatives are hedge fund strategies (e.g., equity long-short, global macro, event-driven) managed with an emphasis on risk control and liquidity. The GMO Alternative Allocation Strategy (“ALTA”) is a liquid alternative solution combining several underlying strategies; ALTA is available in a mutual fund with daily liquidity.

To be a powerful component of your portfolio, liquid alternatives need to deliver strong returns, diversification, and liquidity. It is incredibly challenging to get all three characteristics in one package.

GMO’s Alternative Allocation Strategy (“ALTA”), which offers investors daily liquidity, seeks to deliver a cash +4–6% return with limited beta to traditional risk assets. Because liquid alts are a critical component of our multi-asset portfolios, including our unconstrained Benchmark-Free Allocation Strategy, ¹ we require optimal effectiveness. To this end, the Asset Allocation team engaged in a year-long research effort to maximize the impact of our liquid alternatives program. Our ultimate strategy for achieving objectives is based on four pillars:

1. Deploying multiple unique return drivers—we cast a wide net to generate performance.

2. Utilizing active strategies that attempt to deliver reliable alpha—alpha significantly increases total return without increasing correlations.

3. Being dynamic and opportunistic—we change allocations and bring in new ideas.

4. Using capital efficiently—we make each dollar of invested capital work harder.

Multiple Unique Drivers of Return

There are several systematic ways—typically by going long one asset and short another—to get paid without taking traditional market risk:

• Value: Long cheap, short expensive

• Carry: Long high yield, short low yield

• Quality: Long high quality (i.e., strong, stable fundamentals), short junk (i.e., weak, volatile fundamentals)

• Momentum: Long strong recent performance, short weak recent performance

We tap into multiple return drivers and we do so in different ways, using a multi-strategy approach:

• We employ a broad set of strategies that combine factors in unique ways over varying horizons (e.g., event-driven, global macro, equity long-short, managed volatility, trend) using both quantitative and fundamental analysis.

• We implement those strategies across a wide-ranging set of assets, taking positions in global equities, currencies, rates, credit, and volatility instruments.

Importantly, we are not taking an inherently illiquid strategy and repackaging it as a semiliquid strategy—ALTA’s underlying instruments are all highly liquid.

Proven Alpha

GMO’s proprietary hedge fund strategies have a proven ability to add alpha on top of generic factor returns. For example, the HFRX Merger Arbitrage Index returned 2% annualized over the past 10 years. ² GMO’s Event-Driven Strategy delivered 6% annualized (net) over the same period. Skill can potentially enhance returns without necessarily increasing correlations.

Dynamic and Opportunistic

As the market environment changes, the liquid alts allocation needs to evolve as well. Potential allocation changes may include:

1. New strategies. Last year, we added a new equity long-short strategy to our lineup.

2. Beta (long or short) at extremes. In 2020, when credit spreads blew out, we added high yield to our liquid alts portfolio. ³

3. Opportunistic ideas. When we identify a market anomaly, we seek to exploit it.

The GMO Alternative Allocation Strategy holds two opportunistic positions today:

Opportunistic Idea #1: Value Dislocation

In 2020, we identified that value stocks were trading at nearly their widest discount ever relative to growth stocks. We launched a strategy to capitalize on this dislocation: GMO Equity Dislocation is long cheap value, short expensive growth. ⁴

Opportunistic idea #2: Emerging Market Currency Cheapness

Emerging market currencies are trading at two standard deviations cheap to the U.S. dollar. EM currencies always offer carry (e.g., cash rates in Brazil and Turkey are higher than in the U.S.), but carry can be wiped out by FX depreciation. Due to EM cheapness, we believe appreciation is more likely than depreciation. Additionally, GMO has an 18-year history of delivering strong alpha within EM currencies. ⁵

With three potential sources of return (carry, value, and alpha), we developed an active EM currency strategy that has generated approximately 20% return since its implementation. ⁶

PROVEN ABILITY IDENTIFYING TOP-DOWN OPPORTUNITIES

Cross-team collaboration in creating investment solutions

Left: As of 6/30/2026 | Source: GMO
Stock valuations are calculated on a blend of Price/Sales, Price/Gross Profit, and Price/Economic Book.

Right: As of 7/31/2026 | Source: J.P. Morgan, GMO
Equally weighted index of Brazil, China, Indonesia, India, Korea, Malaysia, Mexico, Russia, Taiwan, and South Africa. As of Feb 2022, we exclude Russia.

Capital Efficiency

Finally, we make efficient use of invested capital by using leverage. We’re not raising debt; we’re simply taking advantage of the features of highly liquid implementation instruments.

• Some underlying strategies require cash-traded instruments (e.g., merger arbitrage/event-driven trades).

• Other underlying strategies require only a small amount of cash collateral for futures or option positions. That allows us to get more exposure with the same cash investment. More exposure means more risk, and more return potential.

In Alternative Allocation, every $1 invested captures about $2 of exposure to underlying strategies. Because of the flat fee structure, investors are getting more exposure to alpha sources for their fees.

Conclusion

GMO’s Asset Allocation team has been using liquid diversifying strategies in portfolio construction for over 20 years. In our experience, you can build an alternatives portfolio that delivers decent returns, consistent diversification, and liquidity. Our ability to do so effectively has been critical to our success in rebalancing our multi-asset portfolios through volatile markets.

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