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Alternative Investments Still Popular Among Financial Advisors

by Phillip Morton, Investors

14 November 2008

A recent survey by investment research firm Morningstar, and Barron’s, the business and finance magazine, has found that both institutions and advisors want alternative investments that are liquid, transparent, and regulated like traditional investments.

“This demand is driving the convergence of traditional and alternative money management," observed Steve Deutsch, director of separate accounts and collective investment trusts at Morningstar.

"We’re seeing more alternative investment strategies in mutual funds and ETFs, higher prevalence of retail and alternative money managers competing for assets under management, and traditional money managers acquiring, merging with, or recruiting alternative investment expertise," he added.

Morningstar and Barron’s conducted the internet-based survey in October 2008; 252 institutions and 1,180 financial advisors participated.

Among the survey findings:

For Institutions

  • Limited partnerships, including hedge funds, direct real estate, and private equity, are the most popular alternative vehicles for institutions.
  • Almost half of institutions surveyed allocate more than 10% of their portfolios to alternative investments, and nearly 20% allocate more than 25% of their portfolios to alternatives.
  • Institutions generally expect their portfolio allocations to alternative investments, particularly hedge funds and private equity, to increase over the next five years. Close to a quarter (23%) of institutions expect to invest more than 25% of their portfolios into alternatives.
  • Previous excitement seen over 130/30 and all manner of leveraged net-long investment strategies appears to have diminished. More than 70% of institutions expect assets invested in leveraged net-long strategies to remain unchanged in 2009.

For Advisors

  • Advisors are predominantly investing in alternative investments through liquid, regulated, and transparent vehicles like mutual funds and exchange-traded funds (ETFs), but they’re also employing other non-traditional investments with their clients, like oil and gas limited partnerships, non-traded Real Estate Investment Trusts (REITs), church bonds, and equipment leasing.
  • Among advisors who work with average individual investors, almost 80% use alternative investments with some clients. About 40% of advisors had more than half of their higher-net-worth clients in some alternative investments.
  • Most advisors, approximately 70%, have no more than 10% of individual investors’ portfolios devoted to alternative investments. About half of advisors allocate more than 10% of higher-net-worth clients’ portfolios to alternatives.
  • Excitement about 130/30 funds also appears to have cooled among advisors. The majority of advisors (86%) do not expect to increase investments in these funds next year.

“We conducted this survey during one of the worst market downturns in history, where traditional US and international investments plummeted and almost no alternative investments provided safe haven," Deutsch added.

"One particularly interesting survey result was that against this backdrop, the majority of both advisors and institutions still reported that they expected to increase usage of alternative investments in the future, and they believed alternative investments will continue to grow in importance versus traditional investments. Recent poor performance of alternatives has not caused advisors or institutions to question their usage," he concluded.

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