More advisors turn to alternative investments to further diversify their clients in volatile market
Key Points
After battling downturns in the stock and bond markets, more advisors are turning to alternative investments, according to a Cerulli Associates survey.
Cerulli sees a “Goldilocks moment” for these assets amid demand for income, higher returns and volatility protection as more products become available.
After battling downturns in the stock and bond markets, more financial advisors looking to further diversify their clients are turning to alternative investments, according to a recent survey from Cerulli Associates.
Falling outside of traditional asset classes, alternative investments are typically added to portfolios for more diversification, income generation and the possibility of higher returns.
The report, surveying 100 advisors during the first half of 2022, found average alternative allocations of 14.5%, with advisors aiming to boost percentages to 17.5% in two years.
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While average industry allocations for alternatives and commodities may be closer to 10%, Cerulli sees a “Goldilocks moment” for these assets amid demand for income, higher returns and volatility protection as more products become available.
Almost 70% of respondents said the top reason for alternative allocations was to “reduce exposure to public markets” and 66% aimed for “volatility dampening” and “downside risk protection,” according to the report. Other top reasons for alternatives were income generation, diversification and growth.
Where advisors are investing
Alternative investments may fall into four categories: hedge funds, private equity, “real assets” like real estate or commodities and pre-packaged investments known as “structured products.”
“We have been using alternatives for a while,” said Ashton Lawrence, a certified financial planner with Goldfinch Wealth Management in Greenville, South Carolina, whose firm has used assets focused on events and company mergers, along with funds offering downside protection through put options.
“When interest rates were extremely low, we wanted to have something that would anchor the portfolio but not be tied to interest rates,” he said.