Alternative Investments Enter a “Goldilocks” Phase

July 19, 2022 — Boston

Advisors express growing demand for alternative investments; intermittent liquidity exposures post “hockey-stick growth” as allocations to a new wave of NTRs and BDCs increase

While volatility roiled markets during 2Q 2022, new research from Cerulli Associates, produced in partnership with Blue Vault, shows not all is doom and gloom and underscores an important opportunity for asset managers. Cerulli sees the current market environment as a Goldilocks moment for alternative investment distribution. Demand for income, inflation protection, enhanced returns, and volatility dampening is coinciding with an increase in supply of products that can help lead to these respective outcomes.

According to the research, advisors are actively increasing alternative allocations as they welcome a wave of product offerings from managers they respect. Advisors report reducing exposure to public markets as a top reason (69% report this as a goal) for using alternative investment products in 2022, while volatility dampening and downside risk protection is a close second (66%). “Wealth advisors are being reminded that it’s wise to adopt an overall investment strategy of employing broad diversification, which includes market non-correlation strategies. That seems to always work in the end,” says Stacy Chitty, managing partner of Blue Vault.

Across investment structures, liquid alternative mutual funds remain the stalwart method for accessing alternatives, with 68% reporting they currently use them. Liquid alternative ETFs are not too far behind, with about half (54%) of advisors reporting some allocation. “Liquid alternatives will remain a welcoming entry point,” says Daniil Shapiro, director at Cerulli, but remarks that a tremendous opportunity exists for less liquid alternatives. Recent years have seen a tremendous buildout of exposures via the intermittent liquidity structures that Cerulli finds to be sensible. “Clearly, there is a market opportunity for products that offer something between the long-term lockups of institutionally oriented structures and the daily liquidity of most stock and bond funds,” he adds. The result is robust growth of assets across non-traded REITs (NTRs), interval funds, tender offer funds, and business development companies (BDCs).

The new intermittent liquidity product wave is certainly better than what came before and alternative investment allocations indeed appear to have hit their stride for investor portfolios. However, Cerulli continues to urge advisors not to view the offerings as a panacea. “Careful evaluation and an astute suitability analysis will be imperative,” says Shapiro. “Firms looking to allocate more to alternatives will need to be prepared for unique distribution challenges and have specialized staff on hand to understand these products and their fit within portfolios.”

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Note to editors

These findings and more are from Cerulli's white paper: Alternative Investments in 2022: Capitalizing on Markets in Turmoil.

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