Forty percent of those not using alternatives feel they are too complex to get a good sense of possible performance. Nearly 42% do not like them because of their lack of transparency, and 31.5% do not like them because of the liquidity problem.
Those who have decreased their use of alternatives in the past year have very specific reasons for avoiding them.
Russell Drabold of Legacy Wealth Management Group LLC in Moorestown, N.J., says his broker-dealer has made it more difficult to use alternatives and that one of his options, real estate, is not doing well now.
Likewise, Mason Dinehart of Silber Bennett Financial in Los Angeles says he had clients in real estate, but the poor market made him question its value as an investment for now.
Most advisors are more enthusiastic about the use of alternatives. Seventy-five percent of the respondents said that in the past year they have increased their use of these products in general and 14.5% said they have increased their use of hedge funds or funds of hedge funds.
"The survey shows that because of market volatility, solutions are clearly needed for investors," says Ray Nolte, Skybridge CIO. "The adoption rate for alternatives [as one of those solutions] is quite strong. The survey reinforces the fact that RIAs and financial advisors are looking for solutions for their clients.
"Some 75% increased their use of alternatives in the last year and more than two-thirds plan to increase their use in the future. The standout [statistic] is that [nearly] 88% say they are using alternatives for diversification or low correlation to the market, which circles back to the market volatility that is causing this high adoption rate for alternatives," he says.
But alternatives are not bought worry-free. Many of the respondents were concerned about the liquidity and transparency, fees, complexity and clarity of the strategies.
Nolte points out that it is industry veterans with years of experience who are embracing these investments: 31% of those using alternatives have used them for two to five years, and 24.63% have been using them for five to 10 years. Nearly one-quarter have included alternatives in their clients' portfolios for 10 years or longer.
Most use a combination of different types of alternative products, but nearly 44% use managed futures and 35% use private equity. More than 30% like funds of hedge funds; nearly one-quarter use hedge funds; and 21% use hedge fund replicators. Most alternative investors (87.94%) say they like hedge funds or funds of hedge funds because of the risk management benefits, such as their low correlation to other asset classes and their diversification. About 40% use them for alpha generation.
"Clients' appetites are increasing for alternative, uncorrelated investments," says Thomas H. Mahoney, the senior managing director of Tangent Capital Partners in New York City, which handles institutions, family offices and high-net-worth individuals, as well as pension funds and endowments. "Hedge funds, private equity and real assets, like real estate infrastructure, are less correlated to the market."