Liquid Alternatives: Alternative Investments Pick Up As The 60/40 Mantra Fades
Alternatives are increasingly showing up on advisors’ radars, says a study by Cerulli Associates.
Rising interest rates, runaway inflation, and geopolitical turmoil have combined to ruin the pitch for the go-to 60/40 portfolio allocation between bonds and equities. Result: Advisors are leaning increasingly towards alternative investments and portfolio allocations to such products have risen sharply this year, according to a study by Cerulli Associates. (Wealth Management)
Alternative Investments in 2022: Capitalizing on Markets in Turmoil (White Paper)
· “Alternative allocations were reported to be significantly higher in 2022, with polled advisors reporting allocating an average of 14.5% and seeking to increase this to 17.5% in two years.
· Intermittent liquidity products in particular are a tremendous draw due to their ability to provide greater income and smoothed returns relative to public markets. Proliferation of quality product is meeting tremendous demand.
· Advisors value the smoothed returns that less liquid products can offer—potentially conflating less uncertainty with lower reported volatility. Cerulli argues that careful product evaluation and astute suitability analysis is as important as ever.”
“Cerulli sees the current market environment as a Goldilocks moment for alternative investment distribution,” the white paper said. “Demand 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.”
Advisor objectives for investing in alternatives
In 2022, what are advisors’ top-of-mind objectives for investing in alternatives?
Reduced exposure to the public markets and protecting against their volatility are the key motivations according to the Cerulli report.
Advisor allocations for alternative investments
Within alternatives, liquid alternatives make up the most significant portion of advisors’ alternative investment allocations, the Cerulli study found.
“Liquid alternative mutual funds and ETFs logged record assets (now more than $1 trillion combined) and flows in 2021 amidst a resurgence in demand, including for nontraditional bond funds and options-based and derivative income offerings, as well as demand for other “hedge-fund-like” strategies,” Cerulli observed.
Secondly, Cerulli finds intermittent liquidity structures to be “exceptionally sensible,” and offer a “tremendous opportunity.”
“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,” the report commented. “The result is hockey-stick growth of assets across non-traded REITs (NTRs), interval funds, tender offer funds, and BDCs.”
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