US institutional investor interest is turning to alternative mutual funds and away from hedge funds.
"Alternative mutual funds and ETFs have grown in breadth and quality in recent years", says Nadia Papagiannis, director of alternative funds research for Morningstar. "Institutional investors are starting to see alternative mutual funds as substitutes for hedge funds, and more financial advisors are incorporating these liquid, transparent investments into their client portfolios."
Advisors also expressed particular interest in yield-producing alternatives. They cited private real estate as their top strategy for planned future investment. In addition, advisors indicated that master limited partnerships (MLPs) drove significant portfolio growth over the last five years.
Advisors shied away from managed futures in 2012 after citing them as their top pick in the two previous surveys. Performance may have been a factor as managed futures ETFs and mutual funds lost 15.6 per cent and 7.4 per cent, respectively, in 2012, similar to their losses in 2011. Institutions and advisors also expressed distaste for the undisclosed performance fees managed futures funds frequently charge.
High fees have overtaken liquidity and transparency as the primary reasons why advisors and institutions may choose to forego alternative investments.
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