Retail Liquid Alternatives A $2T Trillion AUM Opportunity: Goldman

Retail liquid alternatives are in the early stages of a 5-10 year growth trend, capable of generating 15 to 20% annual organic growth, notes Goldman Sachs Group Inc (NYSE:GS) in its recent report.

According to Marc Irizarry and the team at Goldman Sachs Group Inc (NYSE:GS), RLAs would include long/short equity, multialternatives, currencies, market neutral, managed futures, real estate, energy and commodities.

RLAs could be a $2 trillion AUM opportunity: Goldman

According to the Goldman analysts retail allocations can ultimately move toward institutional levels over time. They point out that currently alternatives are 4% of US retail AUM, as against over 20% of institutional allocations. With investors reducing fees by moving towards passive, the analysts believe reinvestment of savings would help solve the cost dilemma, which could be partly holding back adoption.

The Goldman analysts believe the retail industry could turn out to be a $2 trillion AUM opportunity.

The following graph highlights alternatives clocking 26% average annual organic growth since 2007:

[drizzle]Growth of alternatives Goldman

The analysts point out that industry has nearly 400 products currently and 1/3 of those products were launched over the past two years. They believe core alternatives as a faster growth segment.

Increased interest by financial advisors

Citing industry surveys such as Cerulli, the analysts point out that financial advisor interest in alternatives is high with over 50% allocating more than 10% to alternatives. However, key challenges such as fees and product knowledge remain to be addressed.

Goldman analysts also believe investors’ concern over fees could be addressed if low-cost passive penetration is increased.

Drawing parallel to ETFs: Goldman

By drawing parallel to the growth of ETFs, the analysts point out currently there are around the same number of alternative mutual funds as there were ETF’s in 2006 and 45% of advisors use alternative mutual funds.

Goldman analysts note firms are building alternative capabilities through new teams, seeding new products and in many cases buying or expanding capabilities through M&A. The analysts point out that alternative mutual funds have taken in $35 billion of net inflows as of October, despite the S&P 500 posting 27% gain. Hence the analysts believe sustained flows would occur in alternatives even in an improving equity market environment.

However, the analysts point out concerns from the Office of Financial Research in its October report wherein OFR noted mutual funds that are managed using alternative strategies can introduce more complex trading and embedded leverage.

According to Marc Irizarry and the team at Goldman Sachs Group Inc (NYSE:GS), as investors become more asset class-agnostic and seek to diversify across risk factors, alternatives can take shares of fixed income and hybrid product as well as equities. As pointed out in the following Cerulli survey, nearly 50% of financial advisors intend to source alternative allocations from US / international equity and 13% intend to source from fixed income, though another 37% intend to allocate from new investments / cash:

Source of funds for alternatives