Investor Understanding of Liquid Alternatives Remains Low

Research from Cerulli Associates warns consumers broadly do not understand liquid alternative investments—what they are made of or how they are supposed to function. 

A new report from Boston-based Cerulli Associates suggests advisers are struggling to effectively explain and implement liquid alternative investments.

According to the research firm, many consumers simply do not understand liquid alternatives. Thus it has been hard for advisers to effectively implement them, even in situations where liquid alts would be a good fit.

Providers are still optimistic about greater use of the asset class, however: “As managed account sponsors migrate to consolidated platforms, they are beginning to look beyond traditional constituents of a managed account program,” notes Tom O’Shea, associate director at Cerulli. “Sponsors are looking to liquid alternative investments products to expand beyond the traditional vehicles.”

Cerulli data shows liquid alternatives “enjoyed a period of strong growth after the 2008 market crash  … But asset growth in liquid alternatives has been flat since 2014. A decline in alternative fund assets appears to signal a waning interest in liquid alternatives as an asset class. Assets in alternative mutual funds declined from $170 million at year-end 2014 to $167 million in 2016.”

O’Shea warns that one-third of all households have zero familiarity with liquid alts. While some investments are designed to be used by novices with little interest in aggressively managing their accounts—a target-date fund, for example—liquid alternatives require more diligence, especially if they are presented as stand-alone options. 

Further complicating the effort, according to Cerulli, is that a good number of advisers who “place alternatives in consumer portfolios to control volatility find that the promised diversification benefits never materialize.” Like other investment classes, there are better and worse performing liquid alternatives.

“To drive consumer adoption of alternative investments, it is necessary to convince consumers that these products can bring value to their investment portfolios,” O’Shea concludes.

Cerulli’s first quarter 2017 issue of “The Cerulli Edge – U.S. Managed Accounts Edition” discusses restrictions on rep-as-portfolio-manager strategies and offers a reexamination of liquid alternatives and the potential for platform redesign. More information on obtaining Cerulli research is available here