One of the trends in the increasingly popular alternative investment space is a preference for alternative mutual funds instead of traditional hedge funds, according to a new Morningstar survey.

"Overall usage of alternatives continues to increase among both institutional investors and advisors, but the vehicles they're using to implement these strategies are changing," said Nadia Papagiannis, Morningstar's alternative investment strategist.

She reports a $2.7 billion outflow from hedge funds tracked by Morningstar through last year's third quarter versus a $17.3 billion inflow into alternative mutual funds. Papagiannis said investors like the diversification benefits of alternative strategies with the liquidity and transparency of publicly-traded vehicles, and that the investment industry is ramping up products to meet the demand--alternative and commodity mutual funds comprised 14% of all funds launched in 2010 and 20% of all exchange-traded funds.

The survey found that institutional investors use mutual funds and ETFs to carry out more liquid strategies, but still favor hedge funds for less liquid strategies such as arbitrage, corporate actions, and distressed securities.

Conversely, financial advisors use mainly liquid investments--including funds--for their alternative strategies.

Among the survey findings was that more than 70% of institutions anticipate alternative investments to account for more than 10% of their portfolios during the next five years, and that 37% (versus 25% the prior year) plan to allocate more than 25% of their portfolios to alternatives during that period.

Long-short strategies were the alternative allocation of choice among 21% of institutional investors, tops among all categories. Institutions said they'll look at long-short and managed futures strategies most closely during the next five years.

Among financial advisors, more than half expect their clients' allocations to alternatives to grow more than 10% annually during the next five years.

Managed futures were the largest single alternative strategy used by advisors, and that should continue during the next five years, according to survey respondents.

Morningstar and Barron's conducted the Web-based survey from late November through early December. Of the 669 advisors who participated, 65% are affiliated with broker-dealers. Among institutional investors, 65% have assets under management of at least $1 billion.