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).