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After battling a downturn in the stock and bond markets, many financial advisors looking to further diversify their clients are turning to alternative investments, according to a report. Recent surveys from Cerulli Associates.
Outside of traditional asset classes, Alternative investment are often added to a portfolio for greater diversification, income and potential for returns.
The report, which surveyed 100 advisors in the first half of 2022, found an average replacement allocation of 14.5%, with advisors aiming to increase the percentage to 17.5% over two years.
While the industry’s average allocation to alternatives and commodities could be close to 10%, Cerulli sees a “Goldilocks moment” for these assets amid demand for income, higher returns and volatility protection when more products are available.
Nearly 70% of respondents said the top reason for an alternative allotment was to “reduce public market exposure”, and 66% to “reduce volatility” and “protect downside risk”. “, according to the report. Other top reasons for alternatives are income generation, diversification and growth.
Alternative investments can fall into four categories: hedge funds, private equity, “real assets” such as real estate or commodities, and prepackaged investments known as “structured products.” .
“We’ve been using alternatives for a while,” says Ashton Lawrence, a certified financial planner with Goldfinch Wealth Management in Greenville, South Carolina. .
“When interest rates are extremely low, we want something that can anchor the portfolio, but not be tied down by interest rates,” he said.
Scott Bishop, a Houston-based CFP and managing director of wealth solutions at Avidian Wealth Solutions, said his firm has used private equity, private debt, several hedge funds, and a handful of hedge funds. and some “smaller investments” are less attractive to Wall Street banks.
The most popular alternative assets are known as liquid alternative mutual funds and exchange-traded funds, which offer hedge fund-like strategies to everyday investors, according to a Cerulli survey. , along with non-trading real estate investment trusts, cannot be bought and sold on a stock exchange.
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With a wide range of properties falling under the alternative investment umbrella, it’s easy to misunderstand what you own and what it’s designed to do, says Lawrence.
Before diving into alternative investments, you need to have a clear understanding of the underlying asset and the environment where it can best perform. Otherwise, you may have inconsistent expectations, he says.
“A hammer is a tool and a spoon is a tool,” he said. “But if I hold a hammer and try to flip pancakes in the kitchen, I’m going to have a bad experience.”