Advisers' enthusiasm over alternatives curbed

The hot rush into alternative investments may be cooling, at least a bit. Advisers' expectations of alternative growth have come down, according to a survey of advisers and institutions released today by Morningstar Inc. and Barron's. The biggest concern for advisers is high fees, while institutional investors worry about lack of liquidity. Use of alternatives “has begun to slow … as investors have ramped up their allocations, and excitement may be cooling with the lackluster performance of alternatives,” Scott Burns, director of ETF, closed-end fund, and alternative research for Morningstar Inc., said in a statement. Alternative ETF inflows for 2011 were $11.6 billion, the lowest level since 2006, according to Morningstar. And the $23.2 billion in inflows for alternative mutual funds were $1.8 billion less than in 2010. Flows into market neutral and long/short equity funds saw the biggest slowdowns. Notably, 26% of institutions plan to allocate more than a quarter of their portfolios to alternative investments, down from 37% in the last survey. However, flows are holding up in nonequity-based strategies like managed futures and currencies, despite poor performance, Morningstar said. For the second year in a row, advisers said they are most likely to increase exposure to managed futures, despite the fact that managed futures lost 6.9% in 2011, while currency funds have lost money every year since 2008. Overall, the positive flows into alternative categories still compare favorably to the $84.7 billion that fled U.S. equity funds last year, Morningstar said. Morningstar and Barron's conducted the survey in January 2012 and received responses from 264 institutions and 365 financial advisers.