A survey by Cogent Research found 78% of financial advisors use some type of alternative product, with usage highest among wirehouse advisors. In the survey conducted last year, the Cambridge, Mass.-based research firm found 84% of advisors at one of the four national wirehouses employed alternatives in client portfolios. Among other channels surveyed, 78% of independent broker-dealers and 77% of regional broker-dealers used alternatives, followed by 75% of advisors employed by banks and 69% among RIAs.
"A lot of wirehouse advisors had single-manager hedge funds for many years because they had more affluent, qualified clients relative to their peers," says Antonio Ferreira, Cogent's managing director.
On average, Cogent found advisors are allocating 11% of their assets under management to alternative investment classes. Fifteen percent of survey respondents said they were "heavy" users of alternative vehicles (at least 15% of AUM invested in those products). Another 30% said they were "moderate" users (6% to 14% of AUM), and the remaining 45% described themselves as "light" users (1% to 5% of AUM).
And usage of alternatives varies among clients, with 29% of so-called affluent investors (investable assets of at least $100,000) using alternatives and owning an average of 2.1 products. Those numbers rise among high-net-worth individuals (investable assets of at least $2 million), a group where 56% of investors employ alternatives and own an average of 3.5 products.
Ferreira says Cogent's research found that advisors increasingly are gravitating toward alternative strategies provided by mutual funds and ETFs. "Even among users of traditional single-manager strategies, the use of mutual funds and ETFs employing alternative strategies will rise during the next 12 months," he says.
Ferreira says advisors have expressed strong interest in '40 Act alternative funds for various reasons, including the desire to invest in asset classes that in theory aren't correlated to stocks and bonds. Advisors also like that these funds have no lock-up periods and come with significantly lower fees and investment minimums, as well as greater transparency, than traditional hedge funds.
Cogent's survey found advisors believe multi-strategy and managed futures approaches will provide the best opportunities in 2012. "The multi-strategy approach reflects the advisors' desire to be able to access any class that hedge fund managers believe will offer the best opportunities," Ferreira says. "Advisors find that go-anywhere approach to be compelling."
The survey said that advisors are least thrilled with the prospects offered by market neutral and long/short interest investment strategies.
Among providers of '40 Act alternative funds, Ferreira says a number of smaller providers such as Altegris Funds, Hussman Funds, Virtus Investment Partners, and AQR Funds have been gaining mindshare among advisors.
"It's the up-and-coming boutique firms who are standing out in the alternatives category and doing a better job promoting their value propositions," Ferreira says.