Liquid Alternative Assets Could Double By 2018

By Cyril Tuohy

InsuranceNewsNet

Assets in alternative or “alt” mutual fund investments could double in the next five years to $490 billion by 2018, particularly if advisors and investors become more comfortable with such funds, according to an analysis by a mutual fund analytics firm.

Alternative mutual funds, also known as “liquid alternatives,” are finding their way into investment portfolios to help investors generate more income. This comes at a time when safer bond investments are yielding little due to low interest rates.

“Differentiated, liquid alternative investment strategies represent a significant growth opportunity for the investment management industry,” said Avi Nachmany, executive vice president and director of research for Strategic Insight in New York.

Alternative mutual funds are publicly offered, Securities and Exchange Commission-registered funds that use investment strategies. These strategies differ from buy-and-hold techniques ordinarily used by the mutual fund industry. For instance, alternative funds might invest in global real estate, commodities, start-up companies and unlisted securities compared with traditional stocks and bonds.

Alternative funds, which are more complicated than regular mutual funds, can show up in a variable annuity subaccount. This adds the variable component to variable annuities’ fixed investments.

Tamiko Toland, managing director of retirement income consulting with Strategic Insight, previously told InsuranceNewsNet that, at its core, using alternative investments is simply another strategy to manage risk.

“The core of this trend is risk management and people are using these funds underneath the guarantees,” she said.

Alternative investment strategies known as “global unconstrained” and “long/short” have represented the bulk of the growth among alternative funds, but over the next five years, each of these two categories are projected to post compound annual growth rates of more than 20 percent, according to Strategic Insight in “Alternatives Industry Analysis 2013.”

Broker-dealers and advisors, who consider global unconstrained and long/short the gateways to alternative strategy investing, recommended allocations of between 10 percent and 20 percent of a portfolio to alternatives, Strategic Insight said.

Even with more than 90 percent of broker-dealers reporting some use of alternative investments in clients’ portfolios, only 18 percent said they allocated 15 percent or more of overall client assets to alternative investments, Strategic Insight found.

Understanding how alternative strategies and products complement an overall investment picture is the key to an advisor’s successful investment approach, Strategic Insight said.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].