A majority of asset managers surveyed by Cerulli believe investors will want to include more alternatives in their portfolios to serve as a hedge against stock-market declines. Financial advisors also anticipate increasing client allocations to alternatives.
But investors themselves aren't clamoring yet for more alternative products, the researchers said.
"The market crisis has heightened the perceived need for alternative investments, with many advisors looking at these products as diversifiers in their clients' portfolios," according to Cerulli.
Assets in alternative mutual funds rebounded in 2009, rising to $144 billion and surpassing the 2007 high of $134 billion, Cerulli said. Commodity funds attracted the most assets last year, followed closely behind by absolute return/long-short/market-neutral mutual funds, according to the research.
Exchange-traded funds, meanwhile, continue to draw investors, with domestic equity funds the most popular as measured by assets, Cerulli said.
Alternative strategies and asset classes account for about 17% of the ETF market, representing what Cerulli described as a small but significant share. By comparison, alternatives represent just 2% of long-term mutual fund assets, the researchers said.
Commodity-based exchange traded funds and mutual funds have also increased individual investors' access to commodities, according to a forthcoming study in the Journal of Investing from four current and former academics, including a senior managing director at CFA Institute.
That's a good thing since adding commodity futures to portfolios can provide diversification and protection against inflation, the researchers said. Determining when to increase commodity exposure is important.
Adding a modest exposure to commodity futures when the Federal Reserve is raising policy rates significantly increases portfolio returns and decreases risk, the researchers wrote. When the Fed decreases policy rates, adding commodity futures reduces risk but decreases returns.
Allocations to commodities, which have low or even negative correlation to equities, must be at least 5% to achieve these results, the researchers said.
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