Charles Clough, chairman, CEO and portfolio manager at Boston-based Clough Capital Partners, believes that economic and market conditions are shifting to favor active and alternative asset managers.

“I think things are changing for alternatives,” says Clough, who will speak at Financial Advisor’s Inside Alternatives conference in Philadelphia in late October. “There are signals from the marketplace; there’s a process underway that should allow active management to do better.”

During the 10-year bull market, as many alternatives lagged traditional investments, some investors reduced alternative allocations or eschewed active management altogether in favor of capturing the growth of equity indexes. “There are no investors anymore,” laments Clough, who spent 13 years as Merrill Lynch’s chief investment strategist. “Something like 90% of NYSE trading is either based on indexing or algorithmic strategies. There aren’t any investors left. We’re a rare breed.”

Over the past decade, traditional bonds effectively diversified portfolios focused on capturing the strength of equity markets, but they may not be able to do so moving forward, says Rick Lake, chief investment strategist for F/m Acceleration and co-founder of Lake Partners, who will also address attendees at the Inside Alternatives conference. “In recent years, fixed income has helped to hedge equity risk,” Lake says. “With interest rates this low, it is going to be difficult for investors to rely on duration to be as effective a hedge.”

Since fixed-income returns are primarily a product of a security’s yield, a lower-for-longer interest rate environment typically leads to lower-for-longer bond returns, says Lake.

Furthermore, traditional assets have enjoyed an extended period of low volatility with very few interruptions, says Erol Alitovski, a manager research analyst on Morningstar’s multi-asset and alternative strategies team. “There hasn’t been a lot of downside to markets, and alternatives have underperformed, which makes a lot of investors question why they are in alternatives to begin with,” says Alitovski. “Another factor has to do with the volatility of markets and rates: When rates are low, and this is often not accounted for, a lot of volatility strategies don’t perform well.”

Clough says that alternatives and traditional investments, as well as actively and passively managed funds, undergo periods of outperformance and underperformance. He believes investors may be at the beginning of a cycle back toward management. “There tend to be periods that last about a decade where passive outperforms active, and then the baton changes hands and active outperforms passive,” says Clough.

Clough identifies periods in recent market history where passive indexes have clearly been the best-performing investments. For example, in the ’60s, the U.S. equity market was driven by the “Nifty Fifty,” 50 large-cap equities.

“What was happening in that era is that there were new monies coming into the stock market for the first time,” Clough says. “Corporations were investing their pension funds in equities for the first time since the 1930s, and almost all of the flows were controlled by six big New York banks.”

Investors who didn’t own the Nifty Fifty lagged the market. Such momentum-driven runs in equity markets usually fade away within a decade, Clough maintains. “At the end of these growth periods, the largest companies come up against two problems, the first being the base effect: Their capitalization becomes so large that it becomes difficult to move the needle,” he says. “The other effect is regulation. People, including government agencies, take a closer look. This looks like it’s starting to hit the FANG stocks.”

After the fall of the Nifty Fifty in the malaise of the 1970s, the S&P 500 lapsed into decade-long doldrums, while many active funds were able to outperform the index. More recently, the growth of indexed mutual funds and ETFs resembles the rise of the Nifty Fifty. “For the past 10 years, if you weren’t overweight the FANGs, you were probably underperforming,” Clough says.

That scenario may be ripe for change. Low interest rates around the globe, including in the U.S., may push income-oriented investors into alternatives, Lake says.

“In terms of low rates globally, interest rates have fallen to historic lows. We now see negative yields on record amounts of government debt worldwide,” Lake says. “The consequence for investors is that yields on many income-oriented investments may not be sufficient for investors to meet their objectives, particularly for retirees and retirement plans.”

The shortage of yield is already causing investors to shop around for new places to park their money and draw a passive income, Clough argues. Low or negative yields in Europe and Japan have caused many investors in those parts of the world to look to U.S. government and corporate debt as a haven.

As yields on U.S. Treasury and corporate bonds fall, a larger pool of investors is likely to seek income in the equity markets. However, many equity indexes, like the S&P 500, offer investors yields as low as or lower than low-risk fixed-income investments, notes Clough. “There will be demand for active strategies that can focus on yield, or on growth and yield.”

All of those assets pouring into stocks make passive equity market investing more difficult, says Lake, because valuations are becoming stretched.

“Low rates have driven investors into riskier assets,” Lake says. “Now, valuations for many risk assets have reached historically high levels. Price insensitive buyers, which can include passive investors, ETFs and government-related entities, are exacerbating the valuation abnormalities.”

With valuations high and interest rates low, market disruptions become more of a central concern for investors, Lake says. “What goes up can go down,” he says. “Trade and geopolitical tensions, the rise of populist discontent around the world—all of this can unsettle or disrupt globalization, world economies and financial markets. The other mounting pressure, in terms of disruption, stems from rising corporate and government debt levels. All these forces combined leave financial markets and economies vulnerable to policy errors and sudden drawdowns.”

Yet another catalyst for alternative investments is that they have become democratized thanks to technology, product design and regulation, all of which combined offer investors more access to these investments. “It’s probably a good thing to give all investors opportunities to access different markets,” Alitovski says. “It’s important that every investor is educated on the strategies they’re investing in.”

Alternative investment platforms like CAIS and iCapital are offering more advisors access to strategies with fewer hurdles for investors, and regulators are considering opening up some types of alternatives to more investors, with the SEC recently investigating whether some types of private vehicles should be made more widely available. Today, investors have more options to consider when adding an alternative investment—there are now products available from across the entire spectrum of liquidity and transparency, Lake says.

That leaves advisors with the chore of finding the right alternative strategies to suit client needs. Clough argues that investors should demand a certain level of transparency and accessibility from their managers, because the best way to shop around for a good alternative strategy is to build familiarity with the managers themselves.

“How does an advisor find a manager? A prerequisite in any environment is transparency,” Clough says. “We get asked ‘Do you know what XYZ manager is doing’ because people don’t know, they don’t have access to the portfolio. I think investors now need and demand a level of transparency and accessibility, and I don’t think they’re getting either from the behemoth asset managers.”

With perceived weakness in equities, and bond returns looking flat for a long time to come, it may be that more investors will come to recognize the benefits of alternatives in their portfolios. Alternative managers have to meet the challenge of appealing to a different set of investors and advisors than they worked with in decades past, Clough says.

“An awful lot of financial advisors have entered the business in the last 10 years and have seen just a straight-up bull market,” Clough says. “How would I choose an active manager? It’s been easy so far; I’ve been able to offer clients a low-cost way of capturing an index that did better than most active managers. I think that will be harder in the future. They have strong incentives. It’s labor intensive to choose a manager. You have to acquaint yourself with a broad section of managers. Only some of them will have talents that are relevant.”