Assets and interest in alternative investments, which includes non-traditional bonds, hedge funds and commodities funds, are booming. That’s because more advisors are inquiring about them and see them as a diversification tool.
Such were the claims of Fidelity Investments institutional officials about this non-traditional asset class.
“We hear every day that advisors are interested in alternative investments,” says Gary Gallagher, senior vice president, investment products, Fidelity Institutional. “And last year they were one in every four dollars going into an alternative strategy, which is pretty significant.”
The mutual fund giant, in trying to sell more of these investments, has a strategic alliance with Goldman Sachs, Morningstar and CAIS. The latter is a financial technology company offering a platform that has an expanding line of alternative products. Its goal is to make alternative investments more accessible, with clearer reporting data.
Alternative investment products are “clearly growing,” said Josh Charlson, director of alternative investment products for Morningstar. He said the “organic growth” of these products is running at about 20 percent a year. “That’s pretty impressive and far better than any other asset class.”
Last year, 22 percent of net mutual fund flows into Fidelity Institutional went into alternative investment mutual funds, according to Morningstar. Liquid alternative product is growing faster than the illiquid group.
At a news conference on Thursday, Fidelity officials predicted that alternative investments will be going “mainstream” over the next few years. Fidelity’s goal is to “bring single manager hedge fund solutions to the wealth management space,” says Michael Diamond, vice president, product management, Fidelity Institutional Product group.
How will advisors and their clients be persuaded to add another asset class to client portfolios?
“The way we think about alternatives is you have your stocks and your bonds. Now you will be able to add something else that can help drive returns, irrespective of what is going on in the broader market,” according to Larry Restieri, head of product sales for Global Third Party Distribution within Goldman Sachs Asset Management. He claimed that the proper use of alternative investments can “dampen volatility” in down markets.
Still, Gallagher and his strategic partners conceded that these sometimes exotic products offer “a challenge.” The biggest challenge may be the nature of the typical alternative investment, which is anything but a typical financial product. It can run the gambit from event-driven, merger arbitrage and credit distressed products to various global macro investment strategies, among others.