This issue of The Cerulli Edge—U.S. Monthly Product Trends analyzes mutual fund and exchange-traded fund (ETF) product trends as of March 2021, explores advisor use of alternative investments, and examines possible increased demand for hedge funds.

Highlights from this research:  

• Mutual fund assets ended 1Q 2021 just below $19 trillion, having increased about 4% since year-end 2020. Mutual funds ended March and the first quarter on a positive note, adding $58.8 billion in net flows. Interestingly, all asset classes garnered positive flows in March, marking it the first time this has happened since April 2014. Total ETF assets sit just below $6.0 trillion as of March—having been below $4.7 trillion back in October 2020. Like mutual funds, net flows have been a factor for growth, as more than $243 billion has moved into the vehicle from January–March 2021.    

• The volatility associated with the COVID-19 pandemic did not result in a wave of alternative product flows and shook confidence in certain products. Product manufacturers can compete on offering low-cost and liquid allocations or unique exposures. The latter will offer an opportunity for a larger set of managers, but efforts should focus on structures that have enhanced liquidity and offer strong return potential. Opportunity remains for specialist managers to offer attractively priced products in the non-traded REIT (NTR), interval fund, and business development companies (BDC) categories. The ETF vehicle will also offer an opportunity to those that can package strategies in it. Cryptocurrency products—where investors will most need managers’ expertise—are on the horizon.

• Hedge funds are back in favor after a decade of anemic asset growth stemming from poor returns, heightened fee sensitivity, and strong returns across other asset classes. Lower future return expectations for traditional asset classes are one likely cause for the resurgence of hedge fund demand. Demand for hedge funds of funds (i.e., actively managed portfolios of hedge funds) may also increase, as they allow asset owners to access a diversified hedge fund portfolio while delegating monitoring and portfolio structuring to the hedge fund of funds provider. Moreover, insurance general accounts are also a potential avenue for hedge fund asset growth. Nearly one in three (29%) insurers surveyed in 2020 expected to increase allocations to hedge funds over the next 12 months.