Yes, Pigs Do Fly!

Ten years ago, the prevailing thought was that pigs would fly before alternative investments became a mainstream staple for investment advisers. According to the latest research from Cerulli, it’s time for air traffic controllers to wake up because they’re going to have to integrate Dreamliner-sized porkers into flight patterns and guide them into safe landings at airports everywhere.

So why are pigs suddenly sprouting wings and claiming their rights to airspace once ruled by more traditional aircraft? And furthermore, what’s pushing investors into their slipstream?

Cerulli’s study, “Retail Alternative Products and Strategies 2011“, focuses on alternative (including commodities) mutual funds ($201 billion); both traditional ($835 billion) and alternative (including commodities) ($156 billion) ETFs; hedge funds ($2.5 trillion globally, with $721 billion domiciled in the United States); and structured products ($1.4 trillion globally, $151 billion in North America), including exchange-traded notes ($14 billion). The study focuses primarily on products and strategies distributed through retail third-party intermediary channels.

According to the study, the 2008/2009 crisis made asset managers, investors and advisers acutely aware of the shortcomings of traditional approaches to portfolio diversification. Diversification remains the spine of strong portfolios, but portfolio construction/asset allocation is being reconsidered and many in the investing population believe including alternative investment allocations may accomplish the current ultimate goal: volatility reduction.

Alternative mutual funds had their best-selling year in 2010, growing by 60%, resulting in more funds being created, according to the study. Advisers also increased clients’ ETF allocations to 6.9%, after holding it between 4.5% and 4.9% for the previous three years.

In 2011, the key driver for interest in alternatives shifted, as more firms look to differentiate in a crowded marketplace. The survey shows that 79% are distributing alternatives now, as opposed to 53% in 2010.

Cerulli surveyed managers in 2010, asking if the financial crisis helped or hurt their perspective on alternatives. 76% of the surveyed retail channel respondents said the crisis helped them believe in alternatives. This is borne of the last two years of inflows into alternative mutual funds: $31.0 billion in 2009 and a record high of $51.9 in 2010, significantly higher levels than prior to the 2008 market downturn, when flows never exceeded more than $15.2 billion, according to the report.

These inflows are likely to continue and will promote the creation of more alternative mutual funds, says Cerulli. In 2010, 65 new alternative mutual funds launched, where previously the number of annual fund launches never surpassed 50. According to the study, three of the four most successful funds, based on assets raised, were in the commodities sector. The research piece points out that as product proliferation continues, advisers will need to learn to be more selective in their pursuit of differentiation.

Cerulli looked at product development plans for the next 12 months and found more asset managers focusing on a larger percentage of their efforts on alternative assets in 2011 than they did in 2010. Nearly half (47%) of the managers Cerulli spoke to expect their new product efforts to be between 50% and 74% in alternatives. Most expect to launch two to three new alternatives products for the third-party marketplace during the next 12 months. This is in sharp contrast to alternative product development in 2010, which stood at about 7% for new launches, according to Cerulli.

Finally, all of the managers surveyed, 60% are using and 40% of managers plan to use mutual funds to distribute alternative investments in the third-party retail arena. At least 40% of the managers surveyed currently have absolute return, multi-asset strategy, market neutral and commodities in a 1940-Act mutual fund structure, and the survey shows a smaller group offer hedge fund replication and private equity in their lines.

Gee, that alternative investing pig really can fly. What a concept!

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