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The Big Winners if Advisors Wake Up to Alts

Most advisors don’t use alternative investments. This leaves a big opening for asset managers, according to Cerulli Associates.

In 2007, retail investors accounted for 37% of the addressable market for alternative investments but that’s not the case anymore. Now, they account for nearly half the market (48%) and asset managers are yearning to get more of their money flowing into private equity, hedge funds, and more.

For alternative asset managers looking to move downmarket, the “sensible” thing to do is adapt their products and strategies to better suit retail needs, according to a recent report by Cerulli Associates.

But first, asset managers need to dedicate time and resources to educating investors and financial advisors, a critical conduit for retail money, before they can hope to spur changes in portfolios.

Most private wealth advisors (55%) don’t allocate any client money to alternative investments and those who do might not be allocating enough. Among surveyed advisors that use alternatives, the average allocation across advisory channels is below 5%. The wealthiest private investors often allocate 40% of their investable assets or more to alternative investments.

Investors and financial advisors often associate alternative investments with increased risk. In doing so, they mischaracterize some alternatives that can simply and efficiently diversify portfolios, Daniil Shapiro, an associate director at Cerulli, said.

For that reason, advisors should consider alternatives because they align with client objectives.

“Advisors are most focused on providing their clients with downside risk protection (57%) and portfolio diversification (55%)—objectives in which alternative investments can play an important role,” Shapiro said.

Coupled with education, Shapiro suggests that investments that can bridge the gap between private capital’s illiquidity and high minimums and the highly liquid public markets will be successful. 

For example, interval funds blend liquid and illiquid securities but offer intermittent liquidity. Cerulli estimates the interval fund market is approximately $28 billion and expects there is “significant room for growth.” The entire U.S. liquid alternatives universe was $741 billion at the end of the first quarter of 2019. That’s double the size compared to 2009 but assets have remained relatively stagnant over the last five years, according to the research firm.

Asset managers can also better leverage solutions tailored to advisors using alternative investment platforms, such as iCapital Network, CAIS, and Artivest, to reach retail advisors by offering tailored products and strategies to advisors.