Traditional asset managers are steadily crossing over into the alternatives space, developing alternative asset products or acquiring alternative asset businesses to augment their traditional fund offerings and diversify their revenue resources.

Most firms have built their alternative businesses internally; while some have expanded into alternatives through hiring subadvisors. Managers surveyed by Cerulli Research anticipate than within ten years, alternative mutual fund assets will account for 13.6% of total mutual fund assets, up from 2.2% at the end of 2012.

“As investors’ appetites for alternative investments continue to grow, asset managers have been broadening the options available,” said Michele Giuditta, associate director at Cerulli Associates. “Asset managers are developing alternative asset in a liquid ’40 Act mutual fund format for retail investors.”

Simple Alternatives, an alternative mutual fund company, has announced that the firm’s assets under management rose by 25% in the first half of 2013. The S1 Fund (SONEX) is a multi-manager, long/short equity mutual fund.

“Institutional and retail investors have come to embrace ‘liquid alternatives’ recognizing the important role in terms of diversification, liquidity, and other desirable characteristics the strategies can serve in a portfolio,” said James Dilworth, Simple Alternatives founder and CEO. “Growth in liquid alternatives has been driven in a large part by institutional consultants and financial advisors who typically use hedge funds as part of an overall portfolio allocation strategy.”

Institutional investors have been making the shift from investing in fund-of-funds vehicles to investing directly in alternatives, as they look for better performance results, lower fees, and improved liquidity.

Public pension plans that are currently transitioning from funds of funds to direct hedge fund investments, according to Cerulli Research, include New York City Employees’ Retirement System, San Antonio’s Fire and Police Pension Fund, and Oklahoma Police Pensions & Retirement Systems.

Alternative strategies are being made available to retail investors in liquid open-end and closed-end mutual funds and exchange-traded products, such as ETFs and ETNs.

“There is a growing preference for a mutual fund structure over limited partnerships, as the vehicle for access,” said Dilworth. “These are typically allocators that are already investing in hedge funds, have dedicated allocations to hedge funds, and have a growing preference to use the more liquid structure to allocate to the same managers.”

Financial advisers use alternative strategies like S1 Fund in a portfolio to add diversification and potential downside protection during market volatility. Through a disciplined investment process that focuses on strategy allocation, manager selection and risk management, the S1 Fund seeks to grow capital regardless of market direction.

“With a low historical correlation to U.S. bonds and equities, alternative strategies such as long/short equity are gaining traction with investors that are concerned about current market valuations, and the outlook for key asset classes, in a post-Bernanke investment environment,” said Dilworth.