Majority say alternative investments will be “as” or “more” important than traditional investments in next 5 years: survey

10 Nov 2008

According to a survey of 250 institutions and over 1,000 financial advisers conducted by Morningstar and Barron’s and released on Monday, alternative investments have a bright future despite recent performance (results available  here on Morningstar’s website).

But your interpretation of the results may depend on whether you see the alternative investment glass as half-full of half-empty.

First the “half full” view.  In a press release issued by Morningstar, past contributor Steve Deutsch (see previous post) expressed his surprise that although alternative investments haven’t provided a safe haven in the recent market storm,

“…the majority of both advisors and institutions still reported that they expected to increase usage of alternative investments in the future, and they believed alternative investments will continue to grow in importance versus traditional investments…Recent poor performance of alternatives has not caused advisors or institutions to question their usage.”

Meanwhile, Barron’s seems to see the glass as half empty.  The magazine reports in its November 10th issue that,

“Alternative investments like hedge funds and private equity, hammered in the market turmoil of recent months, may take years to regain their popularity.”

The conflicting views stem from the fact that roughly half of advisers said that alternative investments will be “as important” or “more important” than traditional investments (stocks & bonds) over the next five years.  The other half said they would be less important than stocks & bonds over the next five years.

Barron’s seems to have interpreted this result to mean that alternatives will drop in importance over the next five years.  But the actual question wasn’t whether alternative investments would drop or increase in importance, but whether they will be as important as traditional investments.

We called Morningstar and they told us that the actual survey question was as follows:

“To what extent do you think alternative investments will become as important as traditional investments (stocks, bonds, mutual funds, etc.) over the next five years?”

Most advisers would likely say that stocks and bonds are currently more important to their clients’ portfolios than hedge funds, private equity, futures, commodities and infrastructure.  So it should come as no surprise that many advisers say alternative investments will (continue to) be less important than traditional investments going forward.  But this does not mean that those advisers see alternatives as becoming less important than they are today.

Institutions are even more positive on alternative investments.  Almost two thirds (63%) of them said that alternative investments will become “as important”, or “more important” than traditional investments over the next five years.  The mere fact that alternatives will soon rival traditional investments is, quite simply, a major endorsement for these asset classes.

By 1:50pm Monday, Reuters had adopted the glass-half-empty view in a story titled “Investors see hedge funds as less important-poll“.  But Reuters doesn’t actually say what hedge funds are “less important” than.  (Answer: traditional investments, not hedge funds in the past).

Reports Reuters:

“The days of hedge funds as a red-hot asset class may be cooling, according to a new survey released by fund research firm Morningstar on Monday.”

We talked to Morningstar’s Deutsch this afternoon and learned that this survey was also conducted last year (with a different media partner).  Apparently the number of advisers that said alternatives would be “as” or “more” important that traditional investments actually rose to 52% this year from 33% last year.  Yes, rose.  In other words, interest in alternative investments is not “cooling” at all.  It’s heating up.

Surprising, yes.  But those are the facts.

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