Alternative investments (such as hedge funds, real estate, commodities, currencies and managed futures) are becoming more and more mainstream. Even consumer finance/investing magazines detail the advantages of these formerly esoteric investments to potentially mitigate risk and boost portfolio returns. And based on our latest AdvisorBenchmarking research, you are increasingly turning to alternatives to provide your clients with better performance and a wider variety of investment options.
Advisors have turned to alternative investments for a variety of reasons–looking for different investment techniques (40%), seeking absolute returns (38%), filling portfolio allocations (29%), addressing portfolio correlations (28%) and seeking unique vehicle structures (25%). Advisors anticipate a moderate increase in their allocation to alternatives over the next five years. Fifty five percent of advisors estimate that they will increase their use of alternatives up to 25%, while 13% believe they will increase their use of alternatives by more than 75%.
Not only do advisors indicate that their use of alternatives will increase, they also believe that alternatives may become increasingly important in portfolio construction. Nearly one fourth of advisors (24%) believe that alternative investments will become even more important than traditional investments, about one half of advisors (49%) believe that alternatives will not become as important as traditional investments and 27% of advisors believe that alternatives will be just as important as traditional investments.
Alternative Investments Appear to Enhance Returns
Alternative investments are touted as risk mitigators and return boosters, and our research seems to support that positioning. We surveyed advisors to determine if there was a link between advisors who dramatically increased their allocations to alternatives and higher portfolio returns. We found that the largest group of advisors who increased their clients’ allocations to alternatives by more than 100% also had higher portfolio returns (11%-15%). (We surveyed advisors on the performance of their “moderate” risk clients for performance information.) The rise in usage indicates that financial advisors see alternative investments as smart financial choices for some of their clients.
Do Advisors Lag HNW Investors?