Research suggests historic highs in asset valuations and downward pressure on traditional investment returns
Canadian securities regulators are getting ready to open the floodgates for liquid alternatives to be available to retail investors. While the degree to which the options will be embraced is still unknown, a new survey from Cerulli Associates may offer some useful indications.
According to a new report titled U.S. Alternative Investments 2018: Accessing Evolving Alternative Platforms, nearly 40% of advisors in the US are using alternative investments, while 37% are using liquid alternatives. The use of alternative investments is most prevalent among practices with more than US$500 million in AUM (55.2%), while the highest use of liquid alternatives happens among those with US$100 million to US$500 million in assets (51.7%).
“Asset managers report receiving several requests over the past year for multi-strategy (25%), non-traditional bond (22%), infrastructure (18%), and long/short equity (17%),” Cerulli said.
Looking at alternative mutual fund assets, there was a reported 7.2% increase in 2017, and a 2% rise for Q1 2018. Assets in alternative mutual funds peaked in 2014, though the firm’s research suggests that recent flow reversals reflect a growing recognition of the vehicle’s benefits given the current market.
Among the wide range of drivers impacting asset managers’ interest in alternative investments, Cerulli found the top three were:
- Expectations regarding future capital market returns (61%);
- The need to optimize the risk-adjusted performance of investors’ portfolios (58%); and
- The need to diversify product lineups (57%)
The firm also cited a growing recognition among investors “that the U.S. economic expansion is the second-longest on record and asset valuations are at or near historic highs.” The fixed-income space may also become a hotspot for alternatives in the short term as 38% of asset managers expect that demand for non-traditional bond strategies will be the strongest over the next 12 months.
“Going forward, Cerulli’s research suggests that with returns from traditional investments expected to face downward pressure, investors will increasingly turn to alternatives in search of both better alpha opportunities and exposures that will provide necessary diversification benefits to their portfolios,” the firm said.
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