Alternatives are quickly becoming a mainstream allocation in wealth management, so much so that the category is projected to grow by 17 percent annually through 2029, reaching over $3 trillion, compared with about $1.4 trillion today.
Behind that are investment returns that are vaulting clients over the $1 million threshold to become accredited investors and thus eligible for a wider range of alternative products, according to a paper Thursday by Fuse Research Network. And asset managers have been cranking out new funds, including liquid mutual fund and ETFs, as well as semi-liquid 40-Act products.
Currently, about 30 percent to 40 percent of semi-liquid alts are sold through advisors, said Loren Fox, director of research at FUSE Research Network. That category, in which investors can occasionally get partial redemptions, includes interval funds, nontraded business development companies, nontraded real estate investment trusts, and tender offer funds.
“That area is growing very quickly. That’s where you’re seeing a lot of the traditional fund managers having interest. It looks like a mutual fund, so it’s not as big of a leap” compared with illiquid alternatives, he said.
By comparison, most of the liquid alts category, which includes mutual funds and ETFs, appears to be advisor-sold, he said. On the illiquid side, such as hedge funds, only about 7 percent of assets go through advisors, though that is expected to increase to about 9 percent over the next four years, he said.
The trend has encouraged asset managers like BlackRock, Franklin Templeton and Thornburg to build and promote new products for wealth management, motivated by “higher margins and lower turnover than mutual funds and ETFs,” the Fuse report read. But even the incumbents in the alternatives space – Blackstone, KKR, and Apollo – have increasingly been focused on financial advisors.
Part of that trend has meant adding staff whose job it is to help educate advisors, so that they can more easily explain what that 5-or-so percent portfolio allocation is to a client, for example, Fox said.
Most often, alts are sold, not bought, in wealth management, with only about 15 percent of advisors saying client requests led them to add alts to portfolios, he said. The top reasons advisors cite for wanting alts are diversification/lack of correlation to the stock market, as well as the potential for upside and risk mitigation, he said.
The top asset managers to watch are BlackRock, Fidelity, Franklin Templeton, JP Morgan, Pimco, Nuveen, and Calamos, all of which ranked highly for their alts distribution power, educational resources, and brand perception as an alts providers, the report noted.
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