This is What Advisers Look For in Alternative Investments

Alternative investments, a relatively new asset class for investors to consider, has been steadily growing in demand since 2008. Essentially, alternative investments are asset classes that do not correlate with traditional assets such as stocks, bonds and real estate. They typically follow their own cycles and as a result, introducing alternative asset classes could potentially help volatility in investment holdings by reducing the overall exposure to risks, especially when traditional asset classes are performing poorly. Subsequently, investment advisers and wealth managers have been paying much closer attention to this asset class, particularly as their investor clients become increasingly apprehensive about traditional investment offerings; in a sluggish global economy.

Moreover, a recent (2013) analysis conducted by Franklin Square Capital Partners revealed that advisers prefer alternative-investment providers with a high level of integrity and transparency, with 92% ranking that factor as one of the top three most important criteria considered, when selecting a provider. In addition, more than 90% also said strong, consistent performance that offered steady investment returns was another essential characteristic. Another essential factor advisers look for in the alternative asset class is competitive pricing, and a product's correlation to other asset classes. Additionally, the survey revealed thirty-eight percent of the advisers said that they would choose a provider based on the liquidity of the product. These factors advisers consider when investing into alternatives are typically characteristics that investors are seeking due to the volatility and tough conditions of the financial markets.

Historically, the most profitable alternative investments have been an investment secret of high-net worth and institutional investors, but nowadays they are far more available to an eager international investment community. Alternative investments range from private equity to hedge funds to commodities to antiques and can complement a variety of investing strategies. The most important aspect to recognize, is that alternative investments are designed to complement a well-founded portfolio, rather than to serve as the focal point.

Alternative Investment Allocations And Opportunities Increase

Although the stock market dropped 55 per cent at the beginning of the global financial crisis, there were some investors who benefited from their heavy investments in alternatives, which (as we know now) fared much better than stocks and bonds. It would seem that the traditional 60/40 model failed or under-performed in 2008. In fact, the studies that followed showed that allotting 20 to 30 per cent of a portfolio to alternative investments, resulted in both a higher return and a better standard deviation. It is important to note however, that the suggestion of a 20 per cent maximum for the allocation of alternatives in a portfolio is not a hard-and-fast maximum, but rather a widely recognized guideline. Allotting more or less, is at the discretion of the individual investor.

According to a new report by the research firm Cerulli Associates, advisers are increasingly recommending alternative strategies to their clients, including retail clients, with 25 per cent reporting that they have plans to increase their allocations to alternative offerings. The fact of the matter is that there is a lot of benefits to alternative investments, including: relatively high degree of transparency, liquidity, and the costs are much lower. These advantages make it possible for almost anyone, with even a small amount of capital, to invest in alternatives.

"In 2009, we had $500 million in alternative mutual fund assets ... Today, it's $1.5 billion, and that's just adviser-directed. So that's a three-fold increase, and it doesn't include alternative allocations within firm-based models, which have also grown."- Co-Head of Alternative Investments at Raymond James.

The demand for alternative investments at the retail and mass-affluent client level has produced an explosion in new alternative offerings; as well as a wider range of investments within those opportunities. Morningstar, in its latest report on alternative funds (2013), notes that an estimated $19.7 billion moved into alternative assets over the past year alone, with much of that money reportedly coming out of equities. To give an indication of the rising popularity of alternative investments, only 4 per cent of advisers said they do not use alternatives in portfolios, down substantially from the 17 per cent who answered that question back in 2008 (Barron's and Morningstar 2013).