Alternative mutual fund strategies set for rapid growth: Cerulli

Managers expect alts assets to rise by at least 50% in the next three years

Jul 17, 2012 @ 2:15 pm

By Jeff Benjamin

Money managers are increasingly bullish on alternative investment strategies and expect rapid growth, according to Cerulli Associates Inc.

The latest research from Cerulli shows that money managers expect the assets they hold in alternative strategies to increase by at least 50% over the next three years.

This steady push on the part of money managers, combined with an increased appetite for alternative strategies by investors and financial advisers, also could dramatically alter the balance of alternative-to-traditional mutual fund strategies.

Cerulli's forecast suggests that in five years, alternative mutual funds could represent 9.7% of mutual fund assets — more than a 245% increase from today's 2.8%.

In 10 years, Cerulli predicts, alternative funds would make up nearly 16% of all mutual fund assets, a 470% increase from today.

“Some of this growth is being driven by the push from asset managers that are bringing out new products and spending a lot of time in the marketplace educating advisers,” said Cindy Zarker, director of Cerulli's asset management practice.

A channel-specific view shows that a third of retail money managers rate alternative investments as their most important initiative, with another 44% rating it as more important than most initiatives.

However, in the retirement channel, alternatives are less of a focus, with 39% of managers rating them as either not an initiative or less important than others.

The research shows that institutional investors in general are more familiar with alternatives and have been using them since before the financial crisis began in 2007.

Since financial advisers are not as familiar with alternative strategies, Cerulli believes that money managers need to put more emphasis and resources into education and distribution.

“As the use of alternative mutual funds grows, we will likely see more granularity in the discussion of the various types of funds that comprise the universe,” said Alec Papazian, a senior analyst and lead author of the Cerulli research.

“For example, commodities are often discussed separately from the wider alternative universe given their overall size and penetration in the market, compared to other alternative categories,” he added. “Alternative categories will likely have different rates of success, and some will possibly decline. This fracturing of the market may change how managers discuss alternatives, as well as educate advisers and investors.”

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Want to learn more about alternative investments and where they fit in client portfolios? Check out the InvestmentNewsAlternative Investments Conference at the Fairmont Chicago Millennium Park on Oct. 22-23. Learn about liquid and illiquid alternatives, real estate, hedging strategies and ways to generate more income through alternatives.

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