The use of alternative investments — commodities, private equity, hedged funds, managed futures and other non-traditional vehicles — tends to rise in tandem with an individual’s wealth and income. Thus the vehicles are frequently a fixture in the portfolios of the affluent.
What many advisors may not realize, however, is that many of the high net worth (HNW) are investing more of their wealth in the products. A new report from MainStay Investments, a New York Life company, shows that three in five high net worth investors who currently use alternatives have increased their portfolio exposure to the products during the past year.
However, two in five HNW investors say they lack confidence in their knowledge about the products. Hence the need for the assistance of a financial advisor who can help close the knowledge gap.
“HNW investors [say] that financial professionals can play an important role in helping them overcome this challenge, with nearly 60 percent of investors indicating that the perception about alternative investments is influenced by their financial advisor,” the report states.
The survey adds that HNW investors using alternatives have allocated more than a fifth of their portfolio to the products. And a quarter of these investors expect their exposure to alternatives to increase over the next five years.
The research observes also that the high net worth are turning to alternatives to increase diversification (50 percent of respondents) and achieve growth potential (48 percent). Three in five HNW investors also cite principal protection as a key advantage for considering alternatives.
The study shows commodities to be the most commonly held alternative investments. By asset class, the percentage breakdown is as follows:
- Commodities (48 percent)
- Private equity (39 percent)
- Long/short equity (36 percent)
- Hedge funds (34 percent); and
- Managed futures (30 percent)
Survey respondents note also that they mostly invest in alternatives through mutual funds (65 percent). This is followed by exchange-traded funds (40 percent) and managed funds (38 percent).