Alternative Mutual Fund Assets Climb

Terry Flanagan

Asset managers expect alternative mutual fund assets to comprise close to 14% of all mutual fund assets in the next 10 years, according to new research from Cerulli Associates, a Boston-based global analytics firm.

Institutions and advisors have been under pressure to increase returns while keeping risk unchanged. As a result, alternative products are attracting interest from retail and institutional investors, as both are increasingly looking for portfolio diversification, enhanced returns, and risk management.

“Consistent with asset managers’ expectations, we anticipate the use of alternatives in individual investors’ portfolios to grow,” said Pamela DeBolt, senior analyst at Cerulli. “Alternative mutual funds currently comprise about 2% of total mutual fund assets and we expect that number to grow to 14% in the next 10 years.”

Direxion, a provider of liquid alternative investment structures, has expanded its suite of alternative-strategy mutual funds with the introduction of the Direxion Long/Short Global Currency Fund (DXAFX).

The fund, which offers a cost-efficient, liquid and transparent way to obtain direct exposure to currencies, is the latest addition to a lineup that offers institutional-style alternative strategies to the retail marketplace.

“Our fund offers investors the opportunity to directly invest in foreign currencies and potentially benefit whether the U.S. dollar increases or decreases in value relative to those currencies,” said Edward Egilinsky, managing director and head of alternative investments at Direxion. “The fund sets itself apart in the marketplace by offering retail investors both the broad diversification of 19 global currencies — in developed and emerging markets — combined with a long/short approach.”

The actively-managed fund, which utilizes a rules-based, long/short investment approach, can take a long or short position in 19 eligible currencies in both developed and emerging markets.

“Currencies have historically displayed low correlations and independent return streams to other alternative asset classes and strategies, such as managed futures and hedge funds,” said Egilinsky. “The ability of a long/short currency strategy to perform in varied market conditions provides investors the potential for additional diversification within a stock and bond portfolio.”

Year to date, more than $5.3 trillion dollars have traded daily in the currency markets, and although the majority of that trading was done by large institutions, hedge funds and endowments, the individual investor has now gained access, in the form of mutual funds.

Direxion, which manages $7.5 billion, has seen major growth in liquid alternatives, especially in the areas of managed futures and commodities. Most of its distribution for liquid alternatives is through broker-dealers or registered investment advisors, who are looking to use different types of alternative strategies to diversify their portfolios.

Cerulli stresses to asset managers the need to move past positioning alternative investments as one asset class – there are a number of asset classes, strategies, and vehicles that fall under the umbrella of alternatives. The heightened demand for alternative assets offers opportunities for those firms that have developed their alternative product lineup and capabilities.

“According to our advisor research, 25% of advisors plan to increase their allocations to alternative mutual funds, with 5% indicating they plan to increase their allocations by more than 10%,”said DeBolt. “We’ve already seen an increase in the number of advisors incorporating alternative mutual funds into client portfolios.”

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