Investment research firm Morningstar, Inc., and financial magazine Barron’s released highlights of their fifth annual national survey, which examined the use of alternative investments among institutions and financial advisers.
“Alternative mutual funds and ETFs have grown in breadth and quality in recent years,” Nadia Papagiannis, director of alternative funds research for Morningstar, said. “Institutional investors are starting to see alternative mutual funds as substitutes for hedge funds, and more financial advisers are incorporating these liquid, transparent investments into their client portfolios.”
Among the major trends in alternative investment usage and perception, the survey found that:
- Mutual funds are becoming the dominant vehicle used by both advisers and institutions to access the majority of alternative strategies. Alternative mutual funds saw inflows of $19.7 billion in 2012, while Morningstar estimates that among funds in its database, $7.6 billion flowed out of single-strategy hedge funds.
- While 61% of institutions said they accessed long-short strategies via hedge funds in 2010, only 26% indicated that they used hedge funds for that strategy this year. In contrast, more than 45% of institutions said they access long-short strategies via mutual funds versus 38 in 2010.
- Among institutions, the number of “heavy users” of alternatives seems to be growing. More than 20% of institutions, compared with 17% last year, said they expect alternative investments to make up more than 40% of holdings over the next five years.
- Only 4% of advisers said their typical client had no money in alternative investments, down from 17% in the 2008 survey.
With regards to institutions maintaining interest in equity long-short strategies, the survey found:
- In 2012, the long-short equity and nontraditional bond categories saw the largest alternative mutual fund flows of $6.1 billion and $5.9 billion, respectively.
- For the second year in a row, institutions again flagged long-short equity strategies as their top choice for increased allocation-the strategy ranked second for advisers.
- Advisers also expressed particular interest in yield-producing alternatives. They cited private real estate as their top strategy for planned future investment. In addition, advisors indicated that master limited partnerships (MLPs) drove significant portfolio growth over the last five years.
- Advisers shied away from managed futures in 2012 after citing them as their top pick in the two previous surveys. Performance may have been a factor as managed futures ETFs and mutual funds lost 15.6% and 7.4%, respectively, in 2012, similar to their losses in 2011. Institutions and advisers also expressed distaste for the undisclosed performance fees managed futures funds frequently charge.
The survey also found that diversification is still driving alternative investments, as well as that high fees have overtaken liquidity and transparency as the primary reasons why advisers and institutions may choose to forego alternative investments.
The survey was conducted during March 2013 and received responses from 235 institutions and 471 financial advisers. More information about the survey can be found here.
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