Alternative asset mutual funds continue to grow at a torrid pace, a new study from Morningstar and Barron’s magazine shows.


Rise in organic growth

Organic growth rates rose to “eye-popping levels,” with long-short equity strategies leading the way followed closely by multi-alternative strategies and non-traditional bond funds.

“Mutual funds continue to grow as the vehicle of choice for accessing alternative strategies. 2013 marked the strongest asset flows into alternative funds and the largest number of fund launches on record,” Josh Charlson, director of manager research, alternative strategies, said. “For the fourth year in a row, long-short strategies garnered the most interest, but growing apprehension toward the bond market has also contributed to blistering growth in nontraditional bond funds.”

Long-short strategies win in 2013

Long-short strategies were the big winners in 2013, growing by more than 80 percent, as advisors and institutions both cited long-short equity and multi-alternative as top strategies for investment over the next five years. Another category experiencing a surge in light of the US Federal Reserve’s policy of low interest rates was the nontraditional bond category.  More than twenty five percent of advisors cited a poor bond market outlook as a principal reason to invest in alternatives. By a wide margin, advisors and institutions indicated, however, that they valued fixed income alternatives more for their low correlation than their yield and interest-rate hedging.

Interest in mutual funds, as opposed to limited partnership structures, as the preferred method to access alternatives is on the rise.  Fully 73 percent of advisors said mutual funds were the vehicle of choice for advisors to access long-short equity or debt strategies, up from 57 percent last year.  Managed futures, an alternative category with strong direct account options for sophisticated investors, nevertheless saw 48 percent of advisors and institutions say they prefer the mutual fund packaging when accessing the non-correlated asset class, up from 32 percent for institutions accessing managed futures strategies.

Interest in alternatives can be disrupted by high fees

While interest in alternatives has grown significantly over the last several years, the red hot trend may be cooling to a warm stage as survey participants say the biggest sticking point for buying alternative investments is still their relatively high fees.  As a Bloomberg report pointed out recently, some managed futures fund products carry fees as high as seven percent or more and are often hidden in performance table display that is not as clear as one might like.

When selecting alternatives, manager experience is the most important decision attribute, the study found. Interestingly, however, the same study noted that having a core competency in alternative investment strategies was only considered by six percent of those studied to be an important factor in selecting a fund.