While the bloom is still on the alternative mutual fund rose, 2012 hasn't been as kind to alternatives as in years past.
Roughly speaking, alternatives currently represent
So what's driving the slowdown in inflows? Performance may have something to do with it. For example, alternative mutual funds in the US Open End
"I think the reason why the performance has been lackluster has been due to the unusual number of world events that have caused periods of market correlation that we're not usually used to seeing, and that may make [alternatives] seem like market underperformers," he said.
It also doesn't help that advisers, while recognizing the value of alternatives in providing diversification and risk hedging in portfolios, don't know where to look, which strategies to invest in, or whether to take a chance on newer funds, according to industry participants. Distributors are open to adding alternatives funds but they're more selective about the funds they're adding to their platforms.
So what's going to bring advisers and investors back to alternatives? The answer is product development, according
"The engineering of the product has gotten more creative," Papagiannis said. "There's more sector-focused stuff coming out, and firms are getting more niche managers to fill in the hole where the more general managers began."
Other industry observers' opinions vary widely as far the strongest categories within alternatives. For overall categories, director of research
Papagiannis also highlighted long/short equity funds, which she said provide volatility-wary investors a "way of getting their seats wet without having to wade waist-deep" into stocks without any sort of risk hedge. However, Congress Asset Management's Andersen noted long/short as one particularly "frustrating" area where the performance has diverged greatly from market expectations. That said, he expected these strategies to "revive" once the U.S. has resolved its budget situation, exhibiting more "standard" return against long-only managers.
Top selling alternative funds through October include
While Cerulli's Papazian noted declining interest in tactical-type funds that provide inverse or leverage exposure, chief executive officer
"Some of the larger players in the mutual fund industry may struggle as many of their assets move into ETFs. Also, with more hedge-type strategies among ETFs, typical hedge funds are going to have trouble raising assets also," he added.
That perspectives on different categories are so divergent is not surprising given that alternatives represent a "nascent" space, Papazian said. "Managers who are delivering returns are going to do well regardless what alternatives mutual fund category they're in. Even certain categories that aren't doing pretty well overall, managers who are doing well will be able to maintain their flows," he added.
So what should managers pay close attention to? FUSE's Campbell emphasized education and ensuring that advisers-and through them, investors-know what alternatives are and are meant to do. The role of broker-dealers in making sure their financial advisers understand these basics is crucial in helping temper investor expectations.
"This whole concept of your alternatives in your portfolio are doing what they're supposed to do, but compared to the rest of your portfolio, they look like they're underperforming-it's a market scenario that we haven't really had while alternatives were as popular as they are now," said Campbell. "I think it's a scenario that we could see how well advisers and asset managers have communicated what investors should expect from these strategies and how they should perform in various scenarios."
As for managers, Papazian advised that they should tackle specific categories within alternatives, rather than the space as a whole, when gauging whether these strategies "make sense" for their portfolios. Managers should also evaluate whether these strategies are truly part of their expertise. "So if your strength is fixed income and you want to do alternatives, don't suddenly go into MLPs where you don't have a prior presence," he said.
|Copyright:||(c) 2012 Financial Planning. All rights Reserved.|
|Source:||Source Media, Inc.|