By DailyAlts Staff
Can alternative investments help advisors build more robust portfolios for their clients, or are they just hype? That's the subject tackled by a study conducted by Pershing and Beacon Strategies, with the results compiled into a new white paper called Help or Hype: Advisor Perceptions of Alternative Investments. The study was released on June 4 at Pershing's INSITE 2015 conference, and involved interviewing 1,200 advisors, broker-dealers, RIAs, and alternative investment managers. Its major findings include:
- The majority of advisors plan to continue recommending alternative investments over the next year, even as alternatives have underperformed since the Financial Crisis;
- 73% of advisors surveyed said their clients had at least one type of alternative investment in their portfolios;
- 70% said they plan to maintain their current alternatives allocation recommendations over the next year; and
- More than half said they think clients should allocate between 6% and 15% of their portfolios to alternatives.
Other highlights of the study and its accompanying white paper are summarized below.
Illiquid vs. Liquid Alternatives
Fifty-six percent of advisors surveyed said they saw value in allocating to illiquid alternatives in investors' portfolios. These investments often have the advantage of having very low correlation to the public stock and bond markets, and thus they should have a volatility-dampening effect when integrated into existing portfolios.
Liquid alternatives, by contrast, may be slightly more correlated to traditional liquid assets, but their enhanced liquidity and transparency - relative to illiquid alts - is a significant advantage. This is why many accredited and institutional investors, who are legally eligible to invest in illiquid alternatives, are moving to the liquid alts product category, along with retail investors.
"Alternative investments continue to interest all investors, from ultra-high-net-worth and high-net-worth investors to the mass affluent," said Justin Fay, Pershing's vice president of investment solutions, in a recent statement. "Though some lingering skepticism exists about alternatives, largely due to recent lukewarm performance, we are seeing strong flows into this asset category."
Challenges and Concerns
There are, however, many types of alternative investments that don't work well within the liquid format. According to Simeon Hyman, head of investment strategy for ProShares, private equity and private real estate strategies top that list, while global macro and large-cap equity based strategies are among the alternative strategies best suited to the liquid alts format.
Regarding issues related to alternative investments, broker-dealers and RIAs cited operational issues as an area of concern. More specifically, they were unhappy with pricing and time to settlement, tax report, regulation, and processing.
"The findings of the study indicate that communication, product understanding and improvements to operational processes will be critical to mitigating these challenges," said Mr. Fay.
Pershing Alternative Investment Center
Last year, Pershing launched its Alternative Investment Center. According to Mr. Fay, the launch was in response to the need for more education and training in the use of alternatives among advisors.
"Through the center we provide advisors educational resources, research and solutions to position advisors to serve the needs of their clients seeking alternative strategies," Mr. Fay said. "Additionally, we recently introduced Online Order Entry to improve transparency and address the inefficiencies of manually placing orders."
Despite the "lingering skepticism" that Pershing attributes to the recent "lukewarm performance" of alternative investments, the majority of investment advisors surveyed still see the need for non-correlated assets within investors' portfolios, and alternative investments - be they liquid or otherwise - are one area to which advisors and their clients can turn for low-correlation exposure.