Institutions, Advisors Access Alternatives Via Mutual Funds

Jul 7 2014 | 11:47am ET

Institutions and financial advisors increasingly like their alternative strategies in a '40 Act wrapper, according to the latest research from Morningstar and Barron's.

A full 73% of the 301 financial advisors polled in the March survey cited mutual funds as their preferred means of accessing long/short equity or debt strategies, up from 57% in 2013. And 48% of the 372 institutions surveyed preferred mutual funds as a means of accessing managed futures strategies, compared to 32% last year.

“Mutual funds continue to grow as the vehicle of choice for accessing alternative strategies. 2013 marked the strongest asset flows into alternative funds and the largest number of fund launches on record,” said Josh Charlson, director of manager research, alternative strategies, in a statement. “For the fourth year in a row, long-short strategies garnered the most interest, but growing apprehension toward the bond market has also contributed to blistering growth in non-traditional bond funds.”

The survey also found that assets in alternative mutual funds are extremely concentrated. As of May 2014, almost half of all alternative mutual fund assets in Morningstar’s database were concentrated in the 10 largest funds.

More than half the advisors and institutions polled said alternative investments are as important or more important than traditional investments, but that enthusiasm may be cooling: Fewer institutions and significantly fewer advisors cited alternatives as “much more important” than traditional investments in this year’s survey than they did in 2010.
 
After record inflows into alternatives in recent years, growth in alternatives may start to ease, especially for advisors. In the 2010 survey, more than half of advisors said they expected to increase their allocations to alternatives by more than 10% per year; only 39% said the same this year.

As for what's holding them back—both advisors and institutions cited relatively high fees as the biggest sticking point.

When selecting alternative products, both advisors and institutions agree that manager experience trumps other criteria, such as a manager’s investment in the strategy and the amount of a firm’s assets in alternatives. Institutions also placed emphasis on investment process while advisors were more concerned with fees.

Suggesting that there is opportunity for new players to enter the alternatives space, only about 6% of both advisors and institutions said they consider a firm-wide core competency in alternatives an important factor in selecting a strategy.

The survey also found that standard benchmarks, like the S&P 500 Index, are the most common forms of alternatives benchmarking, followed closely by peer groups and risk-adjusted analysis.


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