Words such as arbitrage and derivatives seem to scare investors. At least that is what Invesco says it found in a recent study on alternative investments.
The Power of Alternatives study by Invesco, an independent investment management firm based in Downers Grove, Ill., says people are increasingly putting money in alternative investments but they are afraid of the language associated with it. Advisors need to break through those language barriers to work effectively with clients, Invesco says.
Maslansky + Partners, a language strategy firm In New York City, partnered with Invesco for the study.
For example, Invesco says 77 percent of those surveyed would rather invest in “alternative mutual funds that are bought and sold like any other fund” than in “liquid alternatives” (23 percent), which is the same thing in different words.
“Investors are very open to hearing about how alternatives can help them meet their goals, but this value proposition is quickly clouded by words like derivatives and arbitrage,” says Scott West, head of Invesco Consulting. “By avoiding jargon, advisors can eliminate misconceptions, improve conversations and help their clients understand how these strategies may enhance their portfolios.”
The majority (65 percent) of the 800 investors surveyed say they are comfortable investing in mutual funds, but only 24 percent are comfortable investing in global macro funds, 23 percent in unconstrained equity funds, 20 percent in hedge funds, 19 percent in arbitrage strategies and 17 percent in derivatives.
“Advisors should lead with the known and not with the new in helping investors to understand investment strategies,” West says.
When asked which phrase best describes an investment that does not rise and fall with the markets, only 18 percent selected “non-correlated,” while 59 percent preferred “behaves independently.”
Almost two-thirds of investors would rather invest in “funds that focus on more consistent returns,” while 25 percent preferred “equity funds that give up a little on the upside to get more protection on the downside,” and just 11 percent selected the industry label “long-short equity funds.”
“To shorten the learning curve, advisors should focus on how alternatives can help clients achieve their personal goals, how mutual funds and ETFs offer efficient access to these strategies, and the role alternatives can have in complementing core portfolio holdings rather than calling them satellite investments,” says Walter Davis, alternative investment strategist at Invesco.