Alternative investments on the rise in retail world

Alternative investments on the rise in retail world
Alternative-investment strategies are emerging as a top priority across the asset management landscape — and are also quickly gaining traction with retail investors — according to the latest research from Cerulli Associates Inc.
MAY 03, 2011
Alternative-investment strategies are emerging as a top priority across the asset management landscape — and are also quickly gaining traction with retail investors — according to the latest research from Cerulli Associates Inc. While mutual funds that employ alternative strategies represent just a percentage of the overall fund industry, the expansion into alternatives is seen by fund companies as a “way to differentiate,” according Cindy Zarker, head of Cerulli's retail-asset-management practice. “Asset managers realize that many of the other [more traditional] strategies have become commoditized,” she said. Mutual funds using alternative strategies such as long-short equities and commodities saw assets spike by 60% last year, according to Cerulli's new “Retail Alternative Products and Strategies 2011” report. This compares with a 16% increase in assets by all other long-term mutual funds. Cerulli estimated that 65 alternative mutual funds were launched last year, up from 45 in 2009. Total assets in alternative mutual funds, now at $201 billion, represents just 2.6% of all assets in long-term mutual funds — but that's up from just 1.9% of total mutual find assets in 2009, according to Cerulli. “The growth of mutual fund alternatives will depend on education,” Ms. Zarker said. “Understanding advisers' approach to portfolio construction is critical to creating value-added learning programs, and hiring experienced distribution experts with in-depth understanding of alternative investments will help managers accomplish this.” According to the Cerulli research, 53% of the fund industry claims to offer at least one alternative strategy for mutual funds. The most popular strategies launched last year include long-short equity, absolute return, commodities strategies and managed futures. Ms. Zarker said 40% of the asset management firms that Cerulli is studying are considering launching an absolute-return and/or commodities-based fund. And 7% of firms already have one in development. If the alternative-strategy buzz is getting louder, the fund industry can take some of the responsibility. Two-thirds of the asset managers studied by Cerulli produce more white-paper research on alternative products than on traditional products, and more than half run more portfolio manager conference calls on alternatives than on traditional funds. But despite the increased effort to educate advisers and offer products specifically for a mass market of investors, there remains some confusion over how best to use alternatives in a client's portfolio. While much of the new information on alternatives seems to suggest that they could work to help smooth volatility and reduce risk, most advisers still view them as performance enhancement vehicles. For example, the Cerulli research found that in a conservative portfolio, 64% of advisers recommend allocating 5% or less of their clients' assets to alternatives. In a moderate portfolio, 82% of advisers recommend a 5% to 15% allocation to alternatives. And in an aggressive portfolio, 73% of advisers recommend having 16% to 25% invested in alternatives. According to Ms. Zarker, the current narrow use of alternatives among advisers underscores the need for fund companies to invest in training and education required to boost the use of alternative products.

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