Helping Advisors Blog

Given a level of interest in alternative investing among individuals and financial advisors, I see an opportunity to offer some insights provided by Russell’s recent bi-annual Alternative Investment Survey, which Russell has been conducting since the 1990s.

The survey participants are experienced alternative investment professionals, representing institutional assets in 2012 exceeding $1.1 trillion. While advisors and their clients may not represent billion-dollar portfolios, the report has useful information for all advisors.

In a market environment characterized by uncertainty, high volatility, and low return expectations, many survey participants said they were likely to increase their allocations to alternatives over the next one to three years. The survey also explored issues related to demand, barriers and implementation.

Alternative investment demand:

• Institutional survey participants reported significant allocations to alternative investments – on average allocating 22% (and growing) of their total fund assets. While this greatly exceeds the appetite for today’s typical individual investor, we are detecting increased advisor and client interest in alternative investments.
• The survey cites key demand drivers as diversification (ranked first by a wide margin), volatility reduction, and then returns. Those drivers typically translate to the individual investor market.

Barriers in alternative investing:

• Survey participants reported that “education” is the key to increasing demand. More needs to be done to help institutional investors, particularly their boards and trustees, understand alternatives. That’s equally as important for individual investors (and many advisors).
• Lack of liquidity in alternatives, while a concern for institutional investors, can usually be managed. Individuals, on the other hand, have been shut out of these investments because of liquidity issues related to vehicle structure. That’s changing as new investment products come to market, addressing liquidity and transparency concerns.
• Costs remain a concern for institutional investors because alternatives almost always cost more than traditional investments. Institutions have come to accept this reality if they believe what they’re paying for is worth it. Individuals now face a similar situation, but may not be able to assess the “worth it” component.

Implementing an alternative investment portfolio:

• Liquidity, transparency and restricted access are common implementation concerns. For individual investors, investment minimums have put quality alternative products out of reach. These barriers are now being addressed or removed altogether. New fund vehicles offer daily liquidity and greater transparency. The challenge now centers on evaluating the investment and maintaining the quality in a liquid product.

Institutional investors have long made allocations to alternatives. Russell’s recent survey shows that these allocations are increasing, reflecting today’s difficult economic environment. Individual investors and advisors face the same investment headwinds and may have already begun to consider investments.

The industry is meeting this demand through an increasing number of alternative products designed for individuals. Before taking the plunge, we suggest advisors take some lessons from their institutional brethren:

1. Understand the role alternatives should play (diversification vs. return driver, or both?)
2. Educate clients about the unique characteristics and additional risks of alternatives
3. Ensure that the quality of the investment process translates to the available investment vehicle

While this won’t guarantee success, it may increase the likelihood.

Series: Investing in alternatives