Alternatives Still Used, but Growth Diminishing

According to a survey by Morningstar and Barron’s in January, approximately 65% of advisers and 67% of institutions indicated that alternative investments are as important as or more important than traditional investments, down slightly from the last survey. Institutions indicated rising interest and use of alternative investments in each of the previous three surveys, but this year’s survey saw some retreat. Among the institutions surveyed, 26% indicated they plan to allocate more than a quarter of their portfolios to alternative investments, down from 37% in the last survey.   

For the second year in a row, advisers cited managed futures as the asset to which they were most likely to increase their exposure, while currency funds did not make their top five. Institutions flagged managed futures as the third most popular strategy for increased allocation, while long/short equity (or debt) and private equity/venture capital were the top two strategies for increased allocation.   

Institutions said lack of liquidity was the greatest impediment to using alternative investments, while advisers cited higher fees. Uncertain benefits and lack of transparency were also top detractors.   

Over the years, the percent of advisers concerned about lack of liquidity has fallen sharply, from 60% in 2009, to 40% in the most recent survey, coinciding with the launch of many new liquid alternative products.   

The survey received responses from 264 institutions and 365 financial advisers. Additional results and charts can be viewed here.