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Coming Soon: More Alt Strategies for Mutual Funds — Cerulli

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There’s good news for advisors seeking additional liquid alternative investments for clients.

New research from Boston-based Cerulli Associates, “Alternative Products and Strategies 2013: Identifying Enduring Opportunities in Complex Markets,” reports increased interest among alternatives managers in providing liquid alternative products to retail investors.

“Based on our recent research, we expect to see a range of product offerings from asset managers,” says Pamela Carello DeBolt, a senior analyst with Cerulli Associates in an interview.

“We see a few trends going on,” DeBolt adds.

Traditional alternative managers are crossing over into the (Investment Company Act of 1940) space to diversify revenue stream and offer a broad range of alternative product offerings to multiple investors from retail, high net worth, and institutions, she points out.

In addition, traditional asset managers are adding alternative capabilities through acquisition, partnership and subadvisory.

“When we surveyed asset managers about their plans for product development in the third-party intermediary space, 88% of respondents stated they plan to launch four or more products over the next 12 months ranging across several types of vehicles such as mutual funds (open- and closed-end), ETFs, separately managed accounts,” DeBolt notes.

Distribution Options

According to Cerulli, asset managers are distributing alternative investments to institutions, retail investors and the high-net-worth segment (investors with a net worth between $10 million and $50 million), which straddles the two.

Each market favors specific vehicles in packaging alternative investments.

Large institutions have used alternative strategies for some time, employing them in the form of hedge funds and private investments through commingled and direct limited partnerships, funds of funds, managed accounts, separate accounts and UCITS.

Since 2008, more of these strategies are being made available for retail investors in liquid open-end and closed-end mutual funds and exchange-traded products (ETPs) — exchanged-traded funds (ETFs) and exchange-traded notes (ETNs).

Investment consultants and financial advisors play a vital role in the distribution of these strategies.

More than 50% of surveyed asset managers state that alternative investments are either more important than other initiatives, or the most important initiative within both retail and institutional channels, and 68% state the same for high-net-worth clients. In fact, alternatives are the most important initiative for 35%, 42%, and 32% of managers, respectively, across the aforementioned channels. 

Most Popular Fund Structures

Investors use a number of different structures for their alternative investments. Each vehicle type presents different benefits and drawbacks in regard to control, liquidity, transparency, and operational simplicity.

Historically, the majority of institutional investors either used commingled funds of funds or invested directly as a limited partner in a commingled single-manager fund. Since the recent market crisis, though, separately managed accounts and “fund-of-one” structures, or single-investor funds, have gained popularity, Cerulli says.

These structures provide improved control, transparency, and liquidity. In a separately managed account, the investor owns the underlying assets, and as a result has complete transparency and the ability to terminate the relationship at any time. However, the minimum account size for a separate account is typically $100 million or greater, and therefore is not an option for all investors. 

Alternatives in Mutual Funds

When Cerulli asked asset managers about their product development plans, multi-alternative strategies topped the charts — 43% of asset managers are either currently building or are considering building these products.

To some degree, these products simplify the complex world of alternatives because decisions about which specific strategies to use are made by the fund manager.

There are many things to consider when contemplating alternatives—the appropriate allocation, which strategies, and which manager. Multi-strategy products help with some of these decisions.

Of course, there will always be a segment of advisors who prefer to conduct the portfolio construction themselves, allocating among a bevy of alternative strategy choices including managed futures, absolute return, global macro, arbitrage, and commodities.

Open-end mutual funds are the most popular vehicle for alternative product development, and close to 90% of survey respondents plan to develop four or more alternative products over the next 12 months.

Among asset managers, other areas of interest for product development are currency (41%), arbitrage (38%), frontier markets (38%), and MLP strategies (38%).

Looking back at 2012, some of the biggest increases in the number of funds can be seen for managed future funds, MLP funds, and long/short credit. Product development teams are currently busy navigating the alternative investment space. It is important for these teams to weigh their investment talent and fully understand which solutions meet their clients’ needs, the research group concludes.


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