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Alternative Investments Diversify Portfolios but Some Advisors Still Wary, New Study Finds

4105916_sThe majority of advisors in a recent survey say they intend to keep recommending alternative investments over the next year, yet they believe the asset class has underperformed since the economic crisis.

The findings are reported in a new white paper from Pershing LLC, a BNY Mellon company. They’re based on a survey of 1,200 financial advisors conducted by Pershing in conjunction with Beacon Strategies LLC, along with interviews of advisors, broker-dealer firms, registered investment advisors (RIAs) and alternative investment managers.

The study, “Help or Hype: Advisor Perceptions of Alternative Investments,” was presented Thursday at a Pershing conference.

“Alternative investments continue to interest all investors, from ultra-high-net-worth and high-net-worth investors to the mass affluent,” says Justin Fay, vice president of investment solutions at Pershing. “Though some lingering skepticism exists about alternatives, largely due to recent lukewarm performance, we are seeing strong flows into this asset category. The findings of our study suggest that most advisors are optimistic about the ability of alternatives to deliver diversification benefits over time.”

Most advisors surveyed say their primary goal in using alternative investments is to reduce volatility and diversify their client portfolios. They indicated that 73 percent of their clients have at least one type of alternative investment in their portfolios.

The survey also found:

  • 70 percent of advisors plan to maintain their current alternative investment allocation recommendation for clients over the next 12 months
  • Almost half of advisors surveyed feel that alternative investments have underperformed since 2008
  • More than half of advisors (55 percent) surveyed believe that clients should allocate 6 percent to 15 percent of their portfolios to alternative investments
  • 56 percent of respondents see value in allocating illiquid alternatives to investor portfolios
  • The principal drivers of product selection are the experience of the alternative investment manager and diversification options
  • The majority of advisors who do not currently recommend alternative investments to clients cited product expense, along with disagreement over the viability and basic premise of alternative investments

Traditionally, alternative investments have been defined as products and strategies associated with hedge funds, the white paper notes. “However, the definition has evolved to include liquid alternative mutual funds, as well as illiquid investments such as hedge fund-of-funds, offshore funds, private equity, limited partnerships and limited liability corporations, non-traded real estate investment trusts, public direct participation programs, private debt and managed futures, among others.”

The report adds that alternative investments had a strong showing as recently as the first quarter of 2015. January saw the S&P 500 drop by 3%, yet most broad-based hedge fund indices gained between 1.0% and 1.5%, InvestmentNews reported in February. Of the seven primary alternative mutual fund categories tracked by Morningstar, only long-short equity was negative, posting a 1.4% decline. “In other words,” the report says, “overall, alternative investments as an asset class acted exactly as it should, moving independently of the broad market in a noncorrelated fashion.”

Despite lingering skepticism over the effectiveness of alternative investments because of relatively recent lukewarm performance, the majority of those surveyed still see the need for non-correlated asset classes within their investors’ portfolios. As correlations among stock and bond markets, as well as entire sectors, continue to increase, the role of alternative investments in smoothing volatility and assisting in diversification should only increase.

“Yet challenges remain for alternative investments to be incorporated seamlessly into investor portfolios,” the report concludes. “Chief among them are regulatory and suitability issues, as well as paperwork, processing and operational concerns. Proactive measures taken by many of the firms interviewed are serving to mitigate, but not eliminate, these challenges. Overall results indicate that the viability of alternative investments remains strong.”

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About Michele Schechter

Michele has been a director with Financial Poise since 2012. View her LinkedIn profile here:

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