The Road Less Traveled

While liquid alternatives’ market share of the total fund industry as of the second quarter of 2014 was only 2.1%, according to the 2014 Strategic Insight Alternatives Industry Analysis, the growth of assets in alternative strategies has nearly quadrupled since the 2008 financial crisis, from $83 billion at the end of that year to $304 billion as of 2014’s second quarter.

Further, Strategic Insight projects that ’40 Act [Investment Company Act of 1940] alternative assets will have grown from $272.3 billion at year-end 2013 to $770 billion by year-end 2019, due to a five-year compound annual growth rate of 19%, with demand being driven by the desire for volatility management and, therefore, capital protection for retirees. Thus, retirement plan advisers should consider various alternative investments for their plan sponsor clients. All participants need well-balanced, properly diversified portfolios, but those who are close to retirement, in particular, typically seek to protect their assets.

As to why advisers are turning to alternatives, Strategic Insight’s 2014 Alternatives Adviser Survey found that diversification was the top reason advisers invest client assets in alternative funds (cited by 44.6%). Volatility management ranked second (23.7%), followed by hedging (9.4%) and income (8.9%). As for the strategies advisers find most interesting, nearly one in four (24.3%) named real estate investment trusts (REITs) and master limited partnerships (MLPs) as their top choice. The next three were tactical asset allocation, or rotational strategies (10.4%); long/short equity (9.9%); and private equity (8.6%).

When selecting an alternative strategy, advisers cite track record as their No. 1 concern (45%), followed by the portfolio manager’s reputation (44%) and transparency (40%).