Advisors using alternatives still a minority despite business case, says Fuse

Adoption of emerging structures such as interval funds and BDCs remains low.

Alternative strategies and vehicle structures remain the domain of only a small minority of advisors, according to a new report.

While asset managers have been focused on these products for some time, and high-net-worth and institutional investors have been using them for decades, their presence in the retail space is expanding.

However, Fuse Research Network’s Advisor Trend Monitor Series Report found that adoption remains relatively low among financial advisors.

Almost one-third (31%) of advisors polled for the research use REITs within client portfolios with an average allocation of 5%, while the only other structures used by at least one in ten advisors are private equity and hedge funds.

“A segment of advisors is embracing alternative product structures; however, it remains a minority,” said Mike Evans, director of benchmark research at Fuse. “The overall usage of emerging structures like interval funds and BDCs is limited. This trend is also true for hedge funds, private equity, and private debt.”

BUSINESS CASE

The share of advisors using business development companies — a type of closed-end fund that makes investments in developing and financially distressed firms, typically using heavy leverage — is 9.7% with an average allocation of 3.9%.

For private debt, 8.6% of advisors include this in their client portfolios with an average allocation of 5.2%, and 7.4% of advisors use interval or tender offer funds with an average allocation of 5%.

Evans added that the business case for advisors expanding their use of alternative structures is clear. “The underlying demographics of advisors using these products are highly favorable — larger books of business, more experience and likely a team structure with dedicated due diligence,” he explained. “Firms must take a deliberate approach with any alternative vehicles because the sales cycle will be significantly longer.”