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Portfolio > Alternative Investments

Alternatives Universe

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The trend is clear–investment advisors are allocating more assets to alternative investments. As traditional investments (such as stocks and bonds) fail to generate what is perceived as adequate returns for client portfolios, advisors are increasingly turning to alternative investments (such as hedge funds, real estate, commodities, currencies, managed futures, absolute return mutual funds, long-short mutual funds, and so forth) that potentially provide higher returns and lower correlation to existing portfolio holdings.

Based on our latest AdvisorBenchmarking survey of 326 RIA firms in November 2007, advisors are increasing their use of alternatives to provide their clients with better performance and a wider variety of investment options. A third (33%) of advisors surveyed use alternative investments to achieve absolute returns, 20% are seeking to access noncorrelating assets, while 18% are looking for different investment techniques.


And the movement toward using alternatives looks to continue, with advisors anticipating a moderate increase in their allocation to alternatives over the next five years. More than half (55%) of advisors estimate that they will increase their use of alternatives by up to 25%, while 13% believe they will boost their use of alternatives by more than 75%.

“I think that the trend will continue,” says P.J. DiNuzzo, president and chief investment officer at DiNuzzo Investment Advisors Inc. in Beaver, Pennsylvania. “Any money manager with fiduciary responsibilities needs to build the best portfolio and that’s impossible without the alternative asset classes.” DiNuzzo, whose firm has $235 million in client assets, has an aversion to investing directly in alternatives and instead gains access via mutual funds that employ absolute return strategies. His firm seeks to bring institutional-style investing to its clients.

However, this asset class may still seem exotic to many advisors as more than half (62%) surveyed have less than 10% of their portfolios in alternative investments.


Despite the growing industry trend towards alternatives, advisors’ clients aren’t necessarily clamoring for this type of asset: 67% of advisors said that less than 20% of clients ask about alternative investments. About half (51%) of advisors believe that the main reason clients hesitate to invest in alternative investments is a lack of understanding, followed by a lack of liquidity (13%) and volatility (7%). Most advisors (77%) would like to see mutual fund companies provide educational marketing materials, such as white papers and brochures to help put clients at ease in using alternative investments.

The Key Is Education

Advisors’ interest in education for clients is spot on. To meet the challenges and seize the opportunities of a rapidly expanding alternative investments universe, it’s not enough to have solid skills and an understanding of alternative investment vehicles. Advisors must be able to educate their clients about how alternative investments can benefit their portfolios–and explain these benefits in simple, easy-to-understand terms. If you feel that alternatives may be a good fit for a client’s portfolio, help your client understand the many different investment options, how they can be effectively used in a portfolio and how they may benefit in the long run. As alternatives move “down market” and become increasingly available in packaged structures such as ETFs and mutual funds, advisors who are ahead of the curve with educating their clients will be better positioned for success and have stronger relationships with their clients.

Maya Ivanova is a research analyst with Rydex, an affiliate of Rydex Investments. She can be reached at [email protected].

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AdvisorBenchmarking, Inc., an affiliate of Rydex Investments, is a research and analysis center focused on the RIA marketplace Through its web site,, the firm conducts multiple advisor surveys every year covering a host of business management and investment-management practices. The findings and analysis of the data are then released to the marketplace in the form of annual studies, quarterly research notes and monthly newsletters. The service is aimed at helping advisors grow and enhance their firms by comparing how their businesses fare against other advisors, as well as learning best practices of the most successful advisors.


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