Current market conditions represent a chance for asset managers to increase distribution through more liquid options
Asset managers that offer access to alternative investment strategies are not maximizing an opportunity to address the needs of customers in the retail channel, finds a new report.
According to Cerulli Associates, there’s a climate of increased risk awareness developing among advisors in the U.S. Equity markets are at all-time highs and yields from fixed income have undergone an unexpected downward shift. Meanwhile, political uncertainty in Europe and China present challenges that weigh on investor sentiment.
“[A]dvisors are focused on diversification and downside protection as opposed to alpha generation, with an overarching goal of ensuring that their clients maintain their portfolio strategies through tough times,” Cerulli said.
Depressed allocations and demand
However, surveys reveal that alternatives currently receive less than a 5% allocation in U.S. client portfolios, the firm said. One factor that might help explain the gap is that illiquid alternative strategies are available only to the wealthiest accredited investors, likely through high-net-worth practice advisors.
Meanwhile, liquid alternatives have been shrouded by a perception of underperformance relative to rising equity markets, causing assets invested in such strategies offered in the U.S. to remain stagnant since 2014. The high costs from management fees, shorting, and interest that are charged by more complex alternative strategies have also disappointed advisors.
Alternative asset managers lukewarm on retail market
U.S. based asset managers recognize the soft demand for alternatives within the retail channel. When asked why they offer alternative investment products, nearly nine tenths (88%) say it’s to help investors optimize their portfolios’ risk-adjusted performance. But less than half cite demand from financial advisors (43%), and just over one eight (13%) identified demand from individual investors.
Comparing alternative asset managers’ emphasis on different customer segments, institutional channels were most likely to be classed as more important than most initiatives (64%), followed by high-net-worth groups (44%). Managers showed much less interest in the advisor-sold retail channel, which 40% said were either less important than other initiatives or not an initiative at all.
“Cerulli believes that both traditional and alternative asset managers would do well to place more efforts on the distribution of alternative investments to retail channels,” the report said, identifying opportunities to deliver such products to advisors through liquid-alternative products, internal funds, or the use of alternative-investment platforms.
And despite challenges in the uptake of liquid alternatives, Cerulli noted that 24% of assets in liquid alternative mutual funds are currently sub-advised. That suggests a chance for alternative asset managers and traditional managers to tap one another’s brand and distribution expertise.