Alt Mutual Fund Use Up Sharply at Wirehouses

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.