Over the past 30 years, investors have achieved diversification through a blend of stocks, high-quality bonds and cash.
But today, the traditional asset allocation no longer offers optimal risk management. Investors focused on retirement in particular need access to a broad range of asset classes to manage volatility and decrease risk.
Alternative investments are playing an increasingly important role in asset allocation strategies for financial advisers who seek a way to provide solutions for retirement clients concerned about daily liquidity, lower expenses and simplified tax reporting. They are also important to those who seek to generate positive returns on a more consistent basis than stocks, and those who wish to avoid the extremes of stocks and commodities while outpacing bonds.
Advisers who can educate and offer information about alternatives to their clients are strategically positioning themselves to satisfy a growing public appetite to learn more about these investment solutions.
A recent investor study sponsored by Natixis Global Asset Management showed that 56% of investors have never heard of alternatives as an investment solution, though 81% agree that it is very important to have many different types of investments in their portfolios.
Financial professionals are beginning to realize the significant degree of potential business growth that this presents for those advisers who develop a robust suite of information about alternatives appropriate for investors focused on retirement.
Alternatives are natural diversifiers for traditional portfolio holdings in a variety of ways.
Many offer exposure to assets and strategies that aren't correlated to stocks and bonds. Alternatives also often provide better risk-adjusted returns, due to active risk management.
There are many types of alternative products and strategies, with different levels of risk.
Innovative mutual fund products are among the newest wave of alternative strategies. These funds invest in alternative asset classes and use some alternative techniques but also comply with the Investment Company Act of 1940, which regulates mutual funds.
The demand for these types of strategies is fast gaining momentum. A recent Morningstar Inc. report showed $90 billion of inflows of alternative assets in mutual funds and exchange-traded funds last year, a 65% increase.
Another study showed that nearly half of registered investment advisers and brokers indicate that mutual funds are their preferred structure for investing in alternatives. These trends are significantly accelerating the need for products that provide access to non-correlated asset classes and strategies, as well as the liquidity and transparency of registered investment products.
Alternative-strategy mutual funds vary from those that practice trading strategies using options to short the market to those that include exposure to non-traditional asset classes such as commodities futures and currency forwards. Other examples of alternative mutual funds include absolute-return funds, equity long/short or market-neutral funds, funds of hedge funds, global macro funds,
hedge fund beta replication funds, hedged equity funds and managed-futures funds.
Offering investors greater opportunity to navigate diverse market conditions can result in benefits shared by both financial professionals and their clients, and is symbolized by the growing demand for these products. A recent report showed that 61% of RIAs and 53% of brokers are in favor of using alternatives for many of their clients.
Still, at present, significant un-tapped business growth opportunities remain. Although there is no doubt that the complexity of alternative solutions creates special challenges, these investments also represent a call to action for financial professionals seeking to increase their retirement business and to offer their clients attractive options to build more-resilient portfolios.
Matt Coldren is executive vice president of the Retirement Strategy Group, and Robert M. Hussey is executive vice president of the Institutional Services Group, at Natixis Global Associates.
