Wealthy investors dumping cash and equities, buying alternatives

Alternative investments are 'increasingly becoming core,' strategist says

Mar 4, 2014 @ 12:06 pm

By Carl O'Donnell

High-net-worth investors — often considered a bellwether for retail investors — are upping exposure to alternative investments, primarily at the expense of cash and equities.

A majority of affluent investors, about 60%, that already have alternatives increased their exposure in the last year and another 25% expect to boost holdings in the future. The typical portfolio among high-net-worth individuals currently has about 22% of assets in alternatives, according to a March 4 survey by New York Life's MainStay Investments.

“High-net-worth individuals look at these funds as complementary right now, but they are increasingly becoming core,” said Matthew Leung, head of channel marketing strategies at MainStay Investments.

(More: Could alternatives fit in retirement portfolios?)

Along with increasing exposure, investors are also holding these assets for a long time. The typical investor has been holding alternatives for 8.3 years, the type of holding period that's typical of a core asset, Mr. Leung said.

A major driver of this increased exposure is the proliferation of liquid alternatives, such as mutual funds and ETFs, Mr. Leung said. About 65% of high-net-worth investors use mutual funds for exposure to alternatives, and another 40% use ETFs.

“In the past, the alternatives space was really reserved for private institutional clients,” Mr. Leung said. “These strategies are becoming increasingly accessible for retail investors.”

But the fear of risk is keeping other investors — 49% of respondents — from jumping on the alternative investment bandwagon, according to the survey. This group of people could benefit from a better understanding of these investments, and financial advisers are well-positioned to help, Mr. Leung said.

(Related: Few advisers recommend alternative investments)

In fact, 60% of respondents see advisers as key sources of investing ideas and education. To best serve clients considering these funds, advisers should prepare data and charts showing the benefits of boosting alternatives exposure to about 10% to 15% of a portfolio, Mr. Leung said.

The survey was conducted late last year by Harris Interactive and relied on responses from 806 investors, each of which had at least $1 million in investible assets.

Altegris Investments Executive Vice President Dick Pfister on identifying the right time to invest in alternatives

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