Wirehouse advisors now use more liquid alternative mutual funds than traditional alternative products, such as hedge funds, a recent study found.
Furthermore, wirehouse flows into these liquid-alt products, which hold assets that typically mature in 91 days or less, are outpacing sales of traditional long-term funds, the research conducted by the Money Management Institute and Dover Financial Research finds. Sales of traditional long-term funds fell dramatically from 85% in 2012 to 54% in 2013, the groups say.
“Although alternative ETFs and mutual funds have a small share of total wirehouse assets, they accounted for about 43% of the net flows in 2013,” said the report, released Tuesday.
Part of the growth in this category may be coming at the expense of funds-of-funds hedge assets. “Although pockets of funds of funds continue to thrive, FOF assets at wirehouses dropped 25% over the last three years as the bull market made it difficult to justify the higher fees and lower returns associated with these products,” the study said.
For instance, wirehouse-based alternative assets allocated to the nontraditional bond category hit 46% in 2013, up from 34% in 2012 to 46% in 2013. This shift “is an example of how investors are using liquid alternatives as a complement to their fixed- income holdings rather than as a stand-alone allocation to alternatives,” the research finds.
Long/short equity funds also have been rising in popularity. They now represent 24% of assets in 2013 compared with 14% in 2012. “This strategy is increasingly used as a complement to equity exposures, making long/short equity particularly appealing in a bull market,” the researchers shared.
Shift to Alternatives
The total level of alternative assets held by clients in wirehouse accounts was about $172 billion in 2013, with 51% of these assets invested in liquid-alternative products ($88 billion).
That’s up from 44% in 2012 and 38% in 2011, the MMI/Dover research reveals.
Liquid-alt mutual funds accounted for about $27.2 billion of wirehouse assets in 2013, and a group of five liquid-alternative mutual funds accounted for 75% of net sales in this category, say MMI and Dover Financial Research.
“The rise of blockbuster funds reflects trends throughout the mutual fund industry, as wirehouses streamline their recommended lists and their model portfolios,” the groups noted.
Some factors influencing this “blockbuster” fund trend, the organization says, are investment performance, firm reputation and the distribution strengths of certain asset managers.
The study found that MainStay Marketfield Fund had net flows of $7.1 billion in 2013, representing about 26% of total flows coming from clients with wirehouse reps. Goldman Sachs Strategic Income fund attracted some $4.8 billion in flows, accounting for 18% of net wirehouse flows.
Other top funds included the JPMorgan Strategic Income Opportunities ($3.2 billion), BlackRock Strategic Income Opps ($2.7 million) and BlackRock Global Long/Short Credit Fund $2.3 billion).
Still, wirehouse broker-dealers may want to work more with investors to add alternative investments to their portfolios.
“Most investor portfolios have less than 5% of assets in alternatives, which is well below the 15% to 20% levels recommended for achieving proper portfolio diversification and investors’ objectives,” the report stressed.
As of March 31, these firms—excluding licensed bankers and reps with affiliated units—included about 52,400 FAs with some $6.27 trillion in client assets.