Few advisers recommend alternative investments

Most respondents to a Natixis survey said they use alternatives sparingly and stick to strategies that can be explained to clients more easily.
NOV 15, 2013
Financial advisers shy away from alternative investment products because most are too difficult to explain to clients, a new study shows. Only a quarter of advisers invest regularly in hedge funds, private equity and commodities, according to a study released Thursday by Natixis Global Asset Management. Although the majority of the 1,300 advisers surveyed as part of the study have invested over time in a mix of alternatives, just 25% use them on a regular basis. Those who typically use alternative investments are those who work with high-net worth investors. Watch: Why alts are a must for both bond and equity investors These results leave advisers with a conundrum, as nearly 70% of those surveyed reported that they need to use new portfolio strategies to gain healthy, low-risk returns for clients, rather than relying on traditional methods, the study said. Alternative investments should play a role in all investors' portfolios, said Scott Schweighauser, president and partner at Aurora Investment Management. His firm manages $9.5 billion and solely invests in hedge funds on behalf of clients, including advisers and pension fund managers. "It's definitely going mainstream," Mr. Schweighauser said of alternatives, citing the public's awareness of hedge fund managers such as David Tepper. "This should have a home in everyone's portfolio whether you're a high-net-worth individual or a factory worker saving for retirement." A traditional 60/40 stocks and bond portfolio can't be relied upon for diversification and robust returns in any market, Mr. Schweighauser said. Adding hedge funds to the mix can create more efficiency, he said. Remember: It's critical to tailor alt strategies to match client needs In the Natixis study, the factors that advisers cited for shying away from alternative investments included a lack of knowledge, difficulty justifying the expense and a belief that clients think alternatives carry too much risk. Other advisers surveyed said that they stick to strategies that can be more easily explained to clients. Alternative investments traditionally have been a difficult-to-understand strategy, Mr. Schweighauser said. Part of his job involves educating the public about hedge funds and working to advance such strategies as a retail product, which he thinks will lead to a higher adoption rate. "It has been historically relatively arcane, relatively opaque," he said of hedge funds. "As understanding elevates and increases, I think people will see the value of the long-short approach in, kind of, having more tools in the arsenal to generate returns." What do you think? How are you using alternatives in your clients' portfolios? Join the conversation!

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