Liquid alts cannibalize hedge funds at wirehouses

Market share of liquid alternative assets rises to 51% as major shift in distribution seen

May 6, 2014 @ 1:36 pm

By Joyce Hanson

Liquid alternatives are gobbling up market share of alternatives distributed through wirehouses and have surpassed traditional alts such as hedge funds as the preferred alternative asset class among advisers and investors.

An increase in the share of liquid alts as a percentage of all alts within wirehouses to 51% in 2013, from 38% in 2011, reflects a major shift in the composition of alternative assets distributed through wirehouses, according to a report released Tuesday by the Money Management Institute, a national association representing the $3.4 trillion managed investment industry.

“The majority of wirehouse executives interviewed for the report view this shift as the cannibalization of core traditional alternative products — hedge funds — by their more liquid counterparts,” the MMI said in a summary of the report's key findings.

Consulting firm Dover Financial Research provided the analysis and independent research cited in the report, “Distribution of Alternative Investment through Wirehouses.”

The trend is driven by greater acceptance of the Investment Company Act of 1940 product structure for liquid alternatives, as well as the continued movement of wirehouse investors from retirement accumulation to distribution, according to the report.

Other key findings show that liquid alternatives are more popular as the industry is moving away from product sales to outcomes-oriented portfolio construction that meets investors' financial planning goals.

“Alternatives can now be used as a core component of a portfolio rather than simply a tool for diversification. Since the same strategies are now offered in different product wrappers, an adviser has more flexibility in choosing products which will provide the best solution for a client,” the MMI stated in its summary.

Further driving the shift to liquid alts is the rise of “blockbuster” funds as wirehouses streamline their recommended lists and model portfolios. As a result, a group of five top liquid alternative funds comprised 75% of wirehouse net sales in 2013.

The top seller within this best-of-breed group, at 26% of wirehouse net flows for liquid alternative mutual funds, was New York Life Investment Management's MainStay Marketfield Fund (MFADX), with $7.07 billion of net flows in 2013.

Factors contributing to the five top funds' rise include investment performance, firm reputation and the distribution strengths of asset managers, according to MMI.

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