As markets get frothier, advisers migrate toward alternatives

While the trigger-happy day traders busy themselves chasing the latest hot stock story, financial professionals appear to be embracing a broader perspective on the record-level valuations occurring against the backdrop of global pandemic.

With that in mind, a recent survey shows 98% of financial advisers plan to increase or maintain client exposure to alternative investments in 2021.

The survey of 130 advisers conducted by PPB Capital Partners showed that among the 45% of respondents looking to increase allocations to alternatives, 85% indicated they plan to boost the exposure by 5% to 10% over the next 12 months.

“With the increased volatility in 2020, including a significant drawdown for the S&P 500 Index due to the pandemic, it is reasonable to look in the new year for strategies that zig when the market zags,” said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

“Some advisers will want to show their clients an asset allocation that goes beyond the traditional 60% in equities and 40% in bonds, and alternative funds can provide an option,” Rosenbluth said.

Most of the advisers surveyed said they use alternative strategies for diversification, risk management and to enhance returns.

Only 36% said they use alternatives for income, and less than 15% said they use alts to fulfill a client-driven initiative.

The strategies most likely to see an increase in allocation are real estate, private equity and private credit, according to the research.

Advisers planning to decrease alternatives exposure indicated the reduction will likely come in hedge fund strategies.

“These results are significant,” said Brendan Lake, PPB’s founder and chief executive.

“Almost 50% of advisers said over half of their clients own alternative investments; for 24% of advisers, the increased volatility seen in the markets during the COVID-19 pandemic has changed their view on the need for alternatives,” Lake said. “But implementing alternative investments can present operational challenges for wealth advisers and their clients.”   

The largest hurdle advisers face in increasing their alternative allocations is dedicating the team resources needed for proper manager due diligence, the survey found.

Once a manager and strategy have been selected, firms are often overwhelmed by gathering the required client documentation and completing the lengthy subscription process. This remains true across the industry, even though 62% of advisers said they use electronic subscription platforms.