Alternatives Seen as a Panacea for Volatility

Given the increase in market volatility and a close correlation between asset classes that heretofore provided diversity, advisers may want to consider suggesting alternative investments, such as real estate investment trusts (REITs), private equity and hedge funds, according to a report from BNY Mellon | Pershing, “The Alternative Advantage.”

In a recent survey, the firm learned that 53% of advisers expect to increase their allocations to alternatives by the end of this year. The firm also notes that at the end of last year, there was $7.7 trillion invested in alternatives.

Advisers are increasingly using alternatives, according to BNY Mellon | Pershing. Alternatives can also suit the increasingly sophisticated needs of high-net-worth individuals.

“A lack of recent product development and the delay in the resolution of the fiduciary rule are two reasons for slow REIT growth in the last few years,” according to CCO Capital’s Bill Miller. “However, hopes for sustained economic growth moving into 2019 fuel an argument for increased allocation to REITs going forward.”

Additionally, traded and non-traded REIT fees have come down, and they have increased their transparency. BNY Mellon | Pershing suggests that advisers looking into REITs should consider those that have buffers and cushions against rising rates. Additionally, REITs that feature tenants with mature business models and staying power could translate into more stability, as rental spaces may stay occupied for longer periods of time.

As far as private equity is concerned, it used to be only available for institutional and qualified investors. Today, however, it is available for the mass-affluent.

“Before advisers secure access to a private equity fund, it’s critical for them to take time to perform thoughtful due diligence,” says Justin Fay, director of financial solutions at BNY Mellon’s Pershing. “These learning opportunities not only allow advisers to better understand exactly what’s on the diversified menu of funds but also decide whether it’s the right fit for their client.”

Hedge funds can fill a needed niche in a portfolio against current market outlooks of low yield and high volatility. “Above all else, it’s critically important for advisers to know what’s currently available, understand what’s under the hood of what they are recommending, and determine the right risk/reward combination for each client based on such factors as objective, risk tolerance and suitability,” Fay says.

BNY Mellon | Pershing’s report, “The Alternative Advantage,” can be downloaded here.