2014-2015 Alternatives Survey of U.S. Institutions and Financial Advisors by Morningstar

2014–2015 Survey Overview

  • Survey aims to capture trends in alternative investing among institutions and advisors.
  • This is the ninth annual nationwide survey.
  • Survey was conducted in the spring of 2015, covering the 2014 calendar year period.
  • 149 institutional investors and 233 advisors participated.
  • Institutional survey included 19 questions; advisor survey had 23.
    • Surveys included four free-response questions tackling new topics, such as the effect of CALPERS’ hedge fund exodus, preferences regarding single manager versus multi-manager structures, client characteristics most suitable for alternatives, and attitudes toward nontraded REITS.

Key Take-Aways

Alternative fund flows moderated in 2014, but significant pockets of strength remain.

  • Alternative mutual fund flows declined in 2014 from record 2013 levels, but organic growth rates in alternatives still exceeded all other asset classes.
  • Alternative outflows were lumpy and not necessarily widespread. PIMCO Unconstrained Bond and Mainstay Marketfield lost a combined $23.8 billion in 2014, dwarfing the outflows of any other alternative fund. Meanwhile, the multialternative, managed-futures, and long-short equity categories all saw strong positive net inflows overall.
  • Investor behavior with alternative funds nevertheless raises some concerns. Investors have exhibited elements of performance-chasing with particular funds and categories, and the recent moderation in flows suggests that investors may be wavering in their commitment to hedged strategies after a six-year bull run in equities. The flows trends indicate that investors aren’t always taking a long-term approach to alternatives, which is critical to using these products properly.

Alternatives

Fund launches continue at record clip, despite pullback in flows.

  • Even as flows have moderated, fund companies continue to launch funds at a record clip. Many of these new funds were launched in the multialternative, long-short equity, and non-traditional-bond categories, each of which saw more than 30 new fund creations. The contrast of increasing fund launches against softening flows suggests that currently supply may be outstripping demand. As companies look to stake a claim in this niche space, assets may not come as easily as expected. Fund companies should also consider carefully the rationale and potential market for new alternative funds.
  • But looking ahead, advisors and institutions expressed continued enthusiasm in the survey for alternative strategies including multistrategy, long-short equity, long-short debt, and managed futures, suggesting that demand may strengthen in the future.

Alternatives

Advisors step on the gas, while institutions ease up.

  • Advisors exhibit increased enthusiasm for alternatives, just as institutions appear to be turning more cautious. Some 63% of advisors believe they will allocate more than 11% to alternatives over the next five years, compared with just 39% who expressed that level of commitment in 2013. However, institutions that expected to allocate more than 25% to alternatives declined from 31% to 22%. A similar pattern emerged in responses to questions about current allocations: As compared with 2013, fewer institutions allocated over 40% to alternatives (9% for 2014, compared with 18% for 2013).
  • Institutions, long at the vanguard of alternative investing, may be tempering their enthusiasm as a result of fees, lockups, and poor transparency in traditional hedge funds, as was the case with CALPERS’ announced decision to withdraw from hedge funds. However, respondents to our survey largely denied any influence from the CALPERS decision.
  • A majority of advisors allocate between 6% and 20% to alternatives. While that figure has been largely stable over time, over the past few years more advisors have been increasing their alternative allocations to the 11% to 15% range, moving up from the 6% to 10% range.

Alternatives

Multistrategy funds a top pick for both advisors and institutions.

  • Multistrategy funds were listed as a top current allocation, as well as a top strategy for future allocations, by both advisors and institutions. Multistrategy funds allow advisors to effectively outsource much of the responsibility for selecting and allocating among complex alternative strategies.
  • Long-short equity strategies also garner significant interest from both advisors and institutions, which is consistent with data from prior years.

More sophisticated and wealthier clients viewed as optimal candidates for alternatives.

  • Both advisors and institutions agreed on a “goldilocks” region of suitability characteristics for the ideal alternative investment client. The survey looked at client level of sophistication, distance from retirement, level of assets, required level of return, and level of risk tolerance.
  • Both groups preferred clients to have a higher asset threshold and a higher level of sophistication than average. However, for many other characteristics, respondents agreed that the ideal client for alternatives was right in the middle of many of these suitability ranges.

Alternatives

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