Mutual funds continue to grow as the vehicle of choice for accessing alternative strategies, according to the eighth annual alternative investment survey by Morningstar and Barron’s.
“2013 marked the strongest asset flows into alternative funds and the largest number of fund launches on record," says Josh Charlson, director of manager research, alternative strategies. "For the fourth year in a row, long-short strategies garnered the most interest, but growing apprehension toward the bond market has also contributed to blistering growth in non-traditional bond funds."
Organic growth rates for mutual funds rose to eye-popping levels. Long-short equity funds rose by more than 80 per cent in 2013, followed by non-traditional bond and multi-alternative funds. Advisors and institutions both cited long-short equity and multi-alternative as top strategies for investment over the next five years.
Assets surged in the non-traditional bond category in 2013 as more than a quarter of advisors cited a poor bond market outlook as a principal reason to invest in alternatives. Advisors and institutions indicated, by a significant margin, that they valued fixed income alternatives more for their low correlation than their yield and interest-rate hedging.
Mutual funds continued to make gains across the board as a preferred means for accessing alternative strategies. Mutual funds jumped to 73 per cent from 57 per cent in last year's survey as the stated vehicle of choice for advisors to access long-short equity or debt strategies and to 48 per cent from 32 per cent for institutions accessing managed futures strategies.
Assets in alternative mutual funds are extremely concentrated. As of May 2014, almost half of all alternative mutual fund assets in Morningstar's database were concentrated in the 10 largest funds.
Alternative investments remain important for both advisors and institutions with more than half indicating that they were as important or more important than traditional investments, but enthusiasm may be cooling. Fewer institutions and significantly fewer advisors cited alternatives as "much more important" than traditional investments in this year's survey than they did in 2010.
After record inflows into alternatives in recent years, growth in alternatives may start to ease, especially for advisors. In the 2010 survey, more than half of advisors said they expected to increase their allocations to alternatives by more than 10 per cent per year; only 39 per cent said the same this year.
Advisors and institutions say the biggest sticking point for buying alternative investments is still their relatively high fees.
When selecting alternative products, both advisors and institutions agree that manager experience trumps other evaluation metrics, such as a manager's investment in the strategy and the amount of a firm's assets in alternatives. Institutions also placed emphasis on investment process while advisors were more concerned with fees.
Suggesting that there is opportunity for new players to enter the alternatives space, only about six per cent of both advisors and institutions said they consider a firm-wide core competency in alternatives an important factor in selecting a strategy.
Surprisingly, standard benchmarks, such as the S&P 500 Index, are the most common forms of alternatives benchmarking. Peer groups and risk-adjusted analysis follow close behind as benchmark options.
