Demand for alternative investments points to major portfolio reallocations

Like moths to a flame, financial advisers are increasingly drawn to alternative investment strategies as a means of navigating an economic environment that appears fraught with potential pitfalls.

The findings from a new study by CAIS and Mercer show that nearly 90% of advisers surveyed plan to increase allocations to alternatives over the next two years.

The traditional portfolio model of 60% stocks and 40% bonds has come under increasing scrutiny during the market and economic unrest of the past two years, and it’s not surprising to see advisers and investors diversify into alternatives. But the current swing could represent a kind of seismic shift in portfolio allocation strategies.

“We are increasingly seeing advisers target a three-dimensional portfolio that more closely resembles a 50/30/20 model across stocks, bonds and alts,” said Matt Brown, founder and chief executive at CAIS.

“These findings would seem to confirm that the great reallocation of capital into alternative strategies is well underway within the private wealth channel,” he said.

Brown acknowledged the momentum toward alternative investments created by a sluggish economy, a collapsing stock market, rising interest rates and stubbornly high inflation, but said there were forces at play even prior to those situations that had pushed alternatives to the forefront for advisers.

He cited overall adviser interest in participating in the private markets coupled with alternative asset managers' efforts to court the adviser market as being among the drivers.

Brown said the “evolving regulatory stance on who should be able to invest in alts” also helped.

And then there are the technological advances that are “changing the game completely, by making access and education seamless,” he said.

Chuck Failla, founder of Sovereign Financial Group, said the stage has been set for alternative investment strategies among his client base.

“Alternative investments have become a very popular topic these days, and for good reason,” he said. “With the stock and bond market volatility, investors and their advisers are looking hard to find something that is not correlated to the major indices. Alternatives can very possibly fit the bill.”

Failla, who recognizes the long history of institutional investors allocating to alternatives, said technological innovation has moved many strategies down-market to affluent individual investors.

“The technology that has developed over the years is making it easier for smaller, retail investors to get access to alts,” he said. “To be sure, more access and more options for the retail investor are good, but it will be important for advisers to remain diligent to be sure their clients understand this unique investment category.”

The report from CAIS and Mercer was based on a survey of advisers conducted in October, which showed that real assets, private credit and private equity are the most popular alternative asset classes in the current market conditions.

Zak Boca, founder and CEO of AltExchange, said the current appetite for alternatives is an extension of a trend that began taking off after the 2008 financial crisis.

“In times like these, investors want access to alternatives because they want to get out of the volatile markets,” he said.

Boca credits the increased access to alts to platforms and technology.

“Today the average high-net-worth investor is allocated nearly half to alternatives, and that mirrors where institutions have been for the last 20 years,” he said. “New regulations have enabled alternative platforms to exist. Alts have come a long way and have been democratized to where the average accredited investor at least can participate.”

Gregg Sommer, U.S. financial intermediaries leader at Mercer, said the lines once separating institutional investors and financial advisers are being removed by technology.

“The key is to provide independent financial advisers with the same research and resources currently available to larger institutions, especially when it comes to enhancing portfolio allocations and mitigating risk through private market opportunities,” he said. “These survey results point to the importance of and demand for due diligence around alternative investment opportunities.”

As far as access and appetite goes, 85% of adviser respondents said their clients are looking to invest in either new products or structures within alternatives, while 59% said their clients are looking for both.

At the same time, nearly 7 in 10 asset managers and financial professionals surveyed revealed that their firms are rolling out these new investment products and/or structures to meet demand, including interval funds, 40 Act Funds, and non-traded REITS.

Brown sees the intersection of increasing supply and growing demand radically altering the alternative investments footprint across the wealth management space.

“U.S. wealth management right now is around $40 trillion and is expected to grow to $60 trillion by 2030,” he said. “Think of alternative allocation rates going from the low single digits to 20%. That means upwards of $10 trillion will move from traditional to alternative investments. That’s what we’re calling the great reallocation.”