Alternatives for Retail Hits Inflection Point

Terry Flanagan

An increased appetite among investors for alpha-yielding investment opportunities is fueling growth in alternative assets.

Between 2005 and 2007, global alternative asset classes under management doubled, from $2.9 trillion to $5.7 trillion. Following the 2008-09 recession, global AUM rose to a record $6.5 trillion by the end of 2011, with a growth rate far outpacing that of traditional asset classes.

“Now a third wave of growth in alternative investing is underway, only this time it is encompassing the mainstream,” said a report on alternative assets by SEI. “Alternatives are migrating from institutional to retail markets, just as the use of asset allocation models did several decades back.”

Assets in U.S. alternative mutual funds and ETFs have more than doubled since 2008, and now represent 883 portfolios with more than $550 billion in assets. Alternative UCITs have grown on a similar trajectory.

Nearly three-quarters of financial advisors currently utilize alternative strategies, and am equal percentage say they have increased their usage over the past year, according to SEI.

Some well—known private fund managers, including AQR, Morgan Stanley, Blackstone, and Carlyle have already launched or filed for retail products.

Before launching a retail alternative product, managers should take into consideration various factors, such as the suitability of the investment strategy, the best vehicle for retail packaging, whether to be a direct sponsor or sub-advisor, or whether to launch a standalone fund.

New research from Cerulli Associates, a Boston-based global analytics firm, finds that 47% of asset managers expect to hire dedicated marketing personnel and 41% expect to hire dedicated sales personnel in the next 12 months to support alternative investments.

“We’ve seen an increase in asset managers capitalizing on investor interest in alternatives by broadening their product lines,” said Pamela DeBolt, senior analyst at Cerulli. “To be successful, managers must deepen their staff of dedicated professionals to support these efforts.”

The November 2013 issue of The Cerulli Edge-U.S. Asset Management Edition examines product management teams, alternative investment staffing needs, and asset managers’ use of resources to target third party intermediaries.

“Alternative products can be complex and hard to understand for both advisors and end clients,” DeBolt said. “Firms will be most successful when marketing and sales efforts include a significant educational component.”

According to Cerulli, firms have hired more dedicated sales professionals than any other alternatives-related position in the past year. The number of sales personnel dedicated to alternative products increased 54% from 2012 to 2013 among managers that distributed alternatives to both retail and institutional clients.

“Looking ahead, we are seeing the hiring shift slightly from sales toward increasing marketing staff,” DeBolt said. “Larger firms tend to create more collateral and educational tools, and appropriate levels of staff are required to maintain and update these tools.”

As alternatives are becoming an increased focus and a larger business line for some firms, Cerulli recommends continued evaluation of support levels to ensure that the appropriate resources are committed to alternative product lines on an ongoing basis.

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