Asset managers must adapt to democratization of alternatives

With retail assets growing at an accelerated pace, asset managers have to find ways to bridge portfolio gaps

Asset managers must adapt to democratization of alternatives

With traditional fixed-income and equity markets showing signs of increased volatility, overvaluation, and sputtering performance, retail investors are seeing a stronger case for diversification outside traditional markets. That’s opened a door for alternative investments to move downmarket — as long as asset managers move to capitalize on it.

“Offering alternative investment strategies to retail channels is sensible for asset managers,” said Daniil Shapiro, associate director at Cerulli. “In 2007, retail client channels accounted for 37% of total addressable assets in the U.S. market. As of year-end 2017, that figure has climbed to 48%.”

Shapiro also noted that advisors are concentrating on providing their clients with downside risk protection (57%) and portfolio diversification (55%), objectives for which alternatives can be a natural fit. That has provided a valuable foothold for alternative investments, with 45% of advisors reporting that they use such products.

A trend toward democratization is clearly afoot, but there’s more room for growth: Cerulli has found that the average allocation to alternatives across channels are wallowing below 5%.

Read also: Illiquidity a barrier to alternatives, says PM

With that in mind, the report defined three avenues for asset management firms to participate in the shift of alternative investments into retail portfolios:

  • Liquid alternative products, which offer hedge-fund like strategies in a wrapper with daily liquidity;
  • Alternative investment platforms that provide advisors with access to alternative investments; and
  • Interval funds, which blend liquid and illiquid securities into a strategy with intermittent liquidity.

Cerulli noted that compared with more commoditized equity and fixed-income products, liquid alternative strategies provide asset managers with a chance to command heftier fees, depending on how well they bridge the gap between hedge-fund exposures and public-market exposure. The universe of liquid-alt investments in the U.S. reportedly stood at US$741 million as of the first quarter of this year — double the assets in 2009, but largely stagnant since 2014.

“Behind the broad lack of growth for the strategies is a perceived underperformance relative to equity and fixed-income markets,” the report said. And even though their diversification and downside risk protection features align with advisors’ client portfolio objectives, they still run up against a considerable degree of resistance due to their complexity and higher expenses, both from management fees and other costs such as shorting and interest charges.

Cerulli reported that among liquid alternative categories, non-traditional bond mutual funds gathered the largest inflows (US$7.3 billion) in 2018. As for liquid-alts sold in ETF wrappers, leveraged trading products proved to be most in-demand with US$4.9 billion in inflows.

Looking forward over the next 12 months, asset managers forecast the highest demand for global macro and non-traditional bond funds. “Interest in global macro strategies is likely to be driven by elevated global uncertainty … while nontraditional bond strategies are able to offer exposure unlinked to interest rates” Cerulli said.


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