{"id":239936,"date":"2022-07-21T15:47:29","date_gmt":"2022-07-21T19:47:29","guid":{"rendered":"https:\/\/qa.bluevaultpartners.com\/?post_type=industry-intel&p=239936"},"modified":"2022-08-16T10:32:09","modified_gmt":"2022-08-16T14:32:09","slug":"as-markets-waver-alternatives-hit-their-stride","status":"publish","type":"post","link":"https:\/\/qa.bluevaultpartners.com\/as-markets-waver-alternatives-hit-their-stride\/","title":{"rendered":"As Markets Waver, Alternatives Hit Their Stride"},"content":{"rendered":"

As Markets Waver, Alternatives Hit Their Stride<\/h1>\n

July 20, 2022 | Ali Hibbs | WealthManagement.com<\/p>\n

Advisor demand for alternative investments is growing, according to a new Cerulli study, with exposures to intermittent liquidity products increasing sharply in 2021.<\/em><\/p>\n

A new report from Boston-based financial markets researcher Cerulli Associates found that allocations to certain alternative investment products ticked up sharply this year and that alternative strategies remain top\u00a0of\u00a0mind for more advisors as equity and bond exposures are\u00a0buffeted by inflation, rising interest rates and geopolitical turmoil.<\/p>\n

Advisor respondents said they allocated an average of 14.5% to alternative investments in 2022, with plans to increase that allocation to 17.5% over two years. This is up from 10.5% in 2021, but Cerulli researchers noted that the pool of respondents was likely skewed in both instances toward advisors who already invest in alternatives and\u00a0that\u00a0the actual allocation to commodities and other alternatives is currently closer to 10% across the industry. Even so, the research still indicates significant growth following years of relative inertia. \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0
\n\u00a0
\n\u201cCerulli sees the current market environment as a Goldilocks moment for alternative investment distribution,\u201d the report said. \u201cDemand for income, inflation protection, enhanced returns, and volatility dampening is coinciding with an increase in supply of products that can help lead to these respective outcomes.\u201d<\/p>\n

Produced in partnership with Blue Vault, an alternatives education resource for advisors, the alternatives-focused investment study was based on a survey of 100 advisors\u2014primarily at independent broker\/dealers\u2014and interviews with industry professionals.<\/p>\n

Virag Shah, portfolio strategist at Van Leeuwen and Co., a $317 million registered investment advisor based in Princeton, N.J., said his firm increased alternative allocations earlier this year. \u201cWe added commodities,\u201d he said. \u201cNot just energy or oil, but more broad, general commodities such as metals and agriculture. We added those to the portfolio mix along with other things that we already had previously.\u201d Shah estimated that, under current market conditions, firms should be allocating at least 15% of their portfolio to alternative strategies to see any meaningful benefits.<\/p>\n

The case is \u201cgetting stronger and stronger,\u201d he said, to abandon the longstanding 60\/40 portfolio allocation standard\u2014one to which Van Leeuwen has never adhered.<\/p>\n

Reducing exposure to public markets was advisors\u2019 top reason for using alternative investment products in 2022, cited by 69% of respondents, with volatility dampening and downside risk protection a close second with 66% of advisors. Other reported goals include income generation, portfolio diversification, enhanced returns, inflation hedging, demonstrating their own practice value propositions and responding to client requests.<\/p>\n

\u201cWealth advisors are being reminded that it\u2019s wise to adopt an overall investment strategy of employing broad diversification, which includes market non-correlation strategies,\u201d said Stacy Chitty, managing partner at Blue Vault.<\/p>\n

“Advisors\u00a0are increasingly aware of these product offerings as a wave of both traditional and alternative managers build out capabilities and wholesalers reach out to explain the benefits of the exposures,” according to\u00a0Cerulli Director Daniil Shapiro,\u00a0who coauthored the report with Cerulli Analyst Wenyi Wei.<\/p>\n

Across investment structures, liquid alternative mutual funds remain the most popular, used by 68% of advisors, followed by nontraded REITs (61%) and liquid alternative ETFs (54%). More than half of responding advisors said that the illiquidity of other alternative products is unsuitable for their clients, while also citing product complexity and high management fees as their top obstacles to investing in alternatives with severely restricted\u00a0liquidity. But interest in semiliquid options saw a sharp increase\u00a0in 2021.<\/p>\n

\u201cLiquid alternatives will remain a welcoming entry point,\u201d said Shapiro. But, he added, \u201ctremendous opportunity exists for less liquid alternatives.\u201d<\/p>\n

<\/p>\n

Intermittent liquidity product allocations\u2014to nontraded REITs, interval funds, nontraded business development companies\u00a0and tender offer fund assets\u2014saw a 63.7% year-over-year increase in 2021, growing from $210.6 billion to $344.8 billion after remaining under $200 billion though the previous decade.<\/p>\n

A new generation\u00a0of intermittent liquidity products is proving more palatable to advisors than an earlier crop that saw temporary growth following the last market crisis, according to the report\u00ad. This is due to three primary factors: key M&A transactions (such as Franklin Templeton\u2019s acquisitions of Benefit Street Partners and Alcentra and Apollo\u2019s acquisition of Griffin Capital); product developments with improved consistency, performance and fee structures; and changes in the distribution landscape, including the growth of alternative investment platforms such as CAIS and iCapital. Products from reputable asset managers such as Blackstone, KKR and Apollo are also lending to their growing popularity, Cerulli noted.<\/p>\n

\u201cClearly, there is a market opportunity for products that offer something between the long-term lockups of institutionally oriented structures and the daily liquidity of most stock and bond funds,\u201d said Shapiro. \u201cCerulli believes there is a tremendous opportunity here.\u201d<\/p>\n

Van Leeuwen’s Shah agrees that intermittent liquidity products have been underrepresented in the market and are set to see continued growth over the next five years. \u201cA lot of people don\u2019t really know that market that well yet,\u201d he said. \u201cI think there is a lot of growth opportunity available down the road.\u201d He said that he would personally like to see more alternatives provide limited liquidity, outside of the more common real estate vehicles.<\/p>\n

While the available intermittent liquidity products have improved and \u201cindeed appear to have hit their stride for investor portfolios,\u201d Cerulli still recommends careful evaluation of all alternative investment opportunities\u00a0to determine suitability and insists that they not be viewed \u201cas a panacea.\u201d<\/p>\n

\u201cFirms looking to allocate more to alternatives will need to be prepared for unique distribution challenges and have specialized staff on hand to understand these products and their fit within portfolios,\u201d said Shapiro.<\/p>\n

 <\/p>\n

 <\/p>\n

Get additional insight on the 2022 Cerulli and Blue Vault Alts survey results by joining us<\/a> for a webinar on 8\/17 at 2pm EDT.<\/p>\n

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