- Increasing Demand for Alternative Investments
- Reasons behind Reallocations
- Tech Innovations
- New Investment Products & Structures
Increasing Demand for Alternative Investments
Financial advisors are increasingly drawn to alternative investment strategies as a means of navigating an economic environment that appears fraught with potential pitfalls.
Findings from a study by CAIS and Mercer show that nearly 90% of advisors surveyed plan to increase allocations to alternatives over the next two years.
The traditional portfolio model of 60% stocks and 40% bonds has come under increasing scrutiny during the market and economic unrest of the past two years, and it’s not surprising to see advisors and investors diversify into alternatives. But the current swing could represent a great shift in portfolio allocation strategies.
According to Matt Brown, founder and chief executive at CAIS, we are increasingly seeing advisors target a three-dimensional portfolio that more closely resembles a 50/30/20 model across stocks, bonds and alts.
These findings can prove that the great reallocation of capital into alternative strategies is well underway within the private wealth channel.
Reasons behind Reallocations
Financial professionals acknowledge the momentum toward alternative investments created by a sluggish economy, a collapsing stock market, rising interest rates and stubbornly high inflation, but they consider that there were forces at play even prior to those situations that had pushed alternatives to the forefront for advisors.
Investors can cite overall advisor interest in participating in the private markets coupled with alternative asset managers’ efforts to court the advisor market as being among the main drivers.
According to Matt Brown, evolving regulatory stance on who should be able to invest in alts, also helped.
And then, there are the technological advances that are changing the game completely, by making access and education seamless.
Thus, it appears that, increasingly, alternative investment strategies hold sway amongst a significant number of clients.
Alternative investments have become a very popular topic these days, and for good reason: with the stock and bond market volatility, investors and their advisors are desperately searching for something not correlated to the major indices. At this point, alternatives seem like a good option.
The technology that has developed over the years is making it easier for smaller, retail investors to get access to alts. More access and more options for the retail investor are good, but it will be important for advisors to remain diligent to be sure their clients understand this unique investment category.
Real assets, private credit and private equity have become the most popular alternative asset classes in the current market conditions.
Zak Boca, founder and CEO of AltExchange, thinks the current appetite for alternatives is an extension of a trend that began taking off after the 2008 financial crisis. In times like these, investors want access to alternatives because they want to get out of the volatile markets.
Boca credits the increased access to alts to the platforms and technology: today the average high-net-worth investor has allocated nearly half to alternatives, and that reflects institutional behavior over the last 20 years. New regulations have enabled alternative platforms to exist. Alts have come a long way and have been democratized to the point where the average accredited investor can participate.
So, the lines once separating institutional investors and financial advisors are now blurred by technology. The key is to provide independent financial advisors with the same research and resources currently available to larger institutions, especially when it comes to enhancing portfolio allocations and mitigating risk through private market opportunities. Investors should remember about the importance of and demand for due diligence around alternative investment opportunities.
New Investment Products & Structures
Most financial professionals acknowledge that their clients are looking to invest in either new products or structures within alternatives.
At the same time, asset managers reveal that the firms are rolling out these new investment products and/or structures to meet demand, including interval funds, 40 Act Funds, and non-traded REITS.
The intersection of increasing supply and growing demand can radically alter the alternative investments footprint across the wealth management space.
According to Matt Brown, “U.S. wealth management is around $40 trillion and is expected to grow to $60 trillion by 2030. Think of alternative allocation rates going from the low single digits to 20%. That means upwards of $10 trillion will move from traditional to alternative investments. That’s what we’re calling the great reallocation.”
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