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Alternative-Fund Concentration

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The Money Management Institute released a study in early May that shows how advisors in wirehouse broker-dealers are working 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 explained.

A group of five liquid-alternative mutual funds accounted for 75% of wirehouse net sales in 2013, 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 of the 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 JPMorgan Strategic Income Opportunities ($3.2 billion), BlackRock Strategic Income Opps ($2.7 million) and BlackRock Global Long/Short Credit Fund $2.3 billion).

The total level of assets managed by wirehouse advisors invested in liquid-alternative mutual funds was about $27.2 billion in 2013, according to IMI and Dover.

Another significant finding of the two groups is that there “was a dramatic reversal in wirehouse net flows between liquid-alternative mutual funds and long-term funds” last year. “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,” the groups reported.

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 non-traditional bond category hit 46% in 2013, up from 34% in 2012. 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.