Alternative investments increasingly are playing an important role in asset allocation strategies in investors' portfolios, according to a new Rydex/SGI survey of registered investment advisors (RIAs) and broker-dealers.
The Rockville, Md., firm, known for conducting financial advisor research and for its benchmarking studies, released survey results at a press briefing recently in New York.
"This is not a fad," said Richard M. Goldman, CEO of Rydex/SGI. "There is an acceleration of demand for alternatives because of volatility brought on by the 2008 meltdown, market conditions, and revisiting asset allocation assumptions."
Alternative investments are now becoming more available and are increasingly deployed by financial planners for individual investors, high-net-worth individuals, and others, he said.
As evidence of the growth, Goldman cited a Morningstar report showing a 65% increase in inflows of alternative assets, or nearly $90 billion, in 2009 into mutual funds and exchange-traded funds. According to Morningstar, 25% of advisors are increasing their allocations to alternative assets, while 19% said alternatives played an important role in helping their clients mitigate risk in their portfolios in 2008.
The Rydex/SGI survey of 291 financial professionals (100 RIAs, 94 independent brokers, and 97 wirehouse brokers) conducted online in November-December 2009, explored their knowledge about, usage of and attitudes toward alternative investments.
Among the findings:
Most RIAs (81%) and brokers (79%) surveyed believe traditional asset allocation (stocks, bonds, cash) provide insufficient portfolio diversification.
Most RIAs (61%) and brokers (53%) advocate using alternatives for many clients. However, 26% of RIAs and 35% of brokers think alternatives should be used for a select few clients.
More RIAs, 39%, said they were "very knowledgeable" about alternatives compared with about 25% of brokers. The majority of both groups rated themselves as "somewhat knowledgeable" on alternative investments.
More than half, or 65%, of brokers have less than a 10% allocation in alternative investments. Goldman says this presents a huge opportunity for advisors to gain greater exposure in retirement planning using alternative investments.
He indicated that retirement plans and target date funds represent an untapped opportunity for alternative investments, especially alternative investments packaged in the 1940 Act product structures that provide many of the benefits associated with mutual fund investment such as liquidity, regulatory oversight, transparency, low minimum requirements and general affordability.
Also, he said that while alternative mutual funds tend to have higher fees compared to plain vanilla index funds, investors should consider their potential to enhance returns and mitigate risk in a portfolio. "By packaging alternative exposures such as managed futures and long/short commodities in a retail-friendly mutual fund structure," Goldman said, "we have been able to make accessing strategies that were once reserved for institutions and the ultra high net worth investor more affordable to mainstream investors."
Sanjay Yodh, managing director of alternative investments at Rydex/SGI, said the firm views alternatives two ways-as a "defensive" strategy for managing risk, and an "offensive" strategy "which will assume volatility that gives investors the opportunity for higher returns but in a risk managed way."
"We want to change the mindset of investors and advisors alike to think more about risk management than beating the market with just returns," said Yodh. "We want to help advisors build wealth for their clients, and that has nothing to do with beating the market. It's about compounding returns on a consistent basis."
Leo V. Marzen, CFA, CPA, CFP, principal of Bridgewater Advisors Inc., a fee-only independent advisory firm in New York City with more than $800 million AUM, said his firm had been using alternatives approximately 15 years.
"We haven't turned our backs or eliminated equity strategies," said Marzen, "but we recognize alternatives can be a way of providing the client with a more predictable range of outcomes."
Currently, alternatives comprise about 25% of client portfolios, and Bridgewater intends to increase that to $30%, in line with Rydex/SGI survey findings.
To meet varying levels of advisor sophistication, Rydex/SGI plans to introduce a tiered education program, including an introduction to alternative investments, implementing alternatives in a portfolio, and advanced techniques to implement these products. Rydex/SGI currently conducts ongoing education roundtables and workshops, and recently introduced www.GetAlts.com, an interactive web site geared toward helping investors and advisors understand alternative investments.