Interest in Alternatives Still Hot

More than 70% of institutions expect alternatives to account for more than 10% of their portfolios over the next five years, according to a Morningstar survey.

The Morningstar/Barrons research said 37% of institutions (up from 25% last year) expect their portfolio allocation to alternatives to exceed 25%. The study also found that more than half of advisers expect to see their clients’ allocations to alternatives grow by more than 10% a year over the next five years. The poll covered 151 institutions and 669 financial advisers.

The importance of alternatives continues to increase, according to Morningstar. More than 70% of the institutions surveyed (up from 63% in 2008 and 64% in 2009) and 66% of advisers (up from 52% in 2008 and 58% in 2009) believe that alternatives will be as important or more important than traditional investments over the next five years.  

More than 21% of institutional investors indicated that long-short strategies represent their largest alternative allocation, and it was the strategy most commonly cited for possible future investments. Managed futures was most commonly cited by advisers as the strategy that they intend to consider for investment, and it was the second most commonly cited strategy by institutional investors.

Institutional investors have adopted traditional mutual funds and ETFs to implement more liquid alternative strategies, but continue to use hedge funds to access less liquid strategies like arbitrage, corporate actions, and distressed securities. Advisers, on the other hand, are primarily using liquid investment vehicles to access all alternative strategies, the news release said.

“Overall usage of alternatives continues to increase among both institutional investors and advisers, but the vehicles they’re using to implement these strategies are changing,” said Nadia Papagiannis, alternative investment strategist for Morningstar. “Investors seem to want the best of both worlds when they can get it—the diversification benefits of alternative strategies with the liquidity and transparency of publicly traded vehicles.”  

$2.7 billion has flowed out of the hedge funds tracked by Morningstar through the third quarter of this year, while $17.3 billion has flowed into alternative mutual funds. 

The Web-based survey was carried out in late November through early December 2010.