HNW investors using alternatives, on average, have more than one-fifth of their portfolios invested in alternatives.

High net worth investors on the hunt for diversification and better investment returns are increasing their exposure to alternative investments and pulling cash off the sidelines to do it. However, a large percentage of investors still require more education and guidance to capitalize on the opportunity.

These findings are revealed in “Investing Outside the Box,” a new study on trends in nontraditional investing from MainStay Investments, a New York Life company and Barron’s Top Fund Family. The study was conducted by Harris Interactive among a nationally representative sample of more than 800 HNW investors ages 40-65.

“Allocations into alternatives are growing as HNW investors are taking a closer look at their investment returns and diversification goals, and learning how alternatives can fit into a smart asset allocation strategy,” says Stephen Fisher, president of MainStay Investments. “However, with 39 percent of respondents reportedly lacking confidence in their knowledge of alternatives, there’s a real opportunity to bridge the information gap.”

Among the key findings, HNW investors using alternatives, on average, have 22 percent of their portfolios invested in alternatives. One quarter of these investors (26 percent) see their exposure to alternatives increasing over the next five years by an average of 2.9 percentage points. Another 66 percent believe their level of exposure will remain the same.

Those who already invest in this asset class are reallocating from cash and money market accounts (61 percent), followed by equities (44 percent) and fixed income (22 percent). And 62 percent of HNW investors — who are currently using alternatives in their portfolios — have increased their investment over the past year.

The study further reveals HNW investors are looking to alternatives for diversification (50 percent) and investment growth / return potential (48 percent). Three-in-five HNW investors (60 percent) also view protecting principal as a key role of alternatives.

Interestingly, commodities are the most commonly held alternative investment, followed by private equity and long/short equity:

  • Commodities – 48 percent;
  • Private equity – 39 percent);
  • Long/short equity – 36 percent;
  • Hedge funds – 34 percent; and
  • Managed futures – 30 percent.

And the most common method for investing in alternatives is through mutual funds (65 percent), followed by ETFs (40 percent) and managed funds (38 percent).

“Nontraditional investments are increasingly becoming the norm for HNW investors,” says Matthew Leung, head of channel marketing strategies at MainStay Investments. “In fact, 51 percent of the investors we surveyed agree that within the next five to 10 years, alternative investments will become more mainstream and will be considered a core holding in many investment portfolios.”