RIA’s Turning to Alternatives

After the financial meltdown of 2008, a “flight to safety” defined the investment landscape in 2009.   But if media headlines are any indication, 2010 may be defined by a boomerang effect, caused by advisors shifting client portfolios away from ultra-conservative holdings into more alternative investments such as hedge funds, currencies, limited partnerships, structured notes, private equity, etc.  The recent period of market calm may also prompt some clients to consider switching advisors, which could put pressure on advisors to increase short-term performance.

Betting on Currency

According to a study from Rider University, which I found in “Betting on Currency” from Financial Advisor Magazine, advisors are adding currencies to their client portfolios to simultaneously reduce risk and improve returns.
The report suggests that financial advisors shouldn’t depend just on foreign stocks or bond funds for currency diversification.  The reason being that foreign stock markets have higher correlations with U.S stocks, while foreign currencies have a lower correlation.
Advisors may also be attracted to foreign currencies due to the looming threat of inflation.  “The U.S. is printing more money than other countries,” states Axel Merk, manager of the Merk Hard Currency and Absolute Return Fund. “The dollar is weak and deteriorating.  A flight to safety will benefit the U.S. dollar less than in the past.  The U.S. dollar will be a loser for the very long term.”

A Hedge Fund Resurgence

After four quarters of net withdrawals, hedge funds recorded net asset inflows in the third quarter of 2009 — adding $1.1 billion in new capital, according to a recent recent survey by Financial Research Corporation.  RIA firms were responsible for some of these asset flows and some have plans to invest more.  In fact, advisors in the RIA channel are more comfortable with alternative investments including hedge funds than their wirehouse counterparts.

According to Ron Fiske, Executive VP at Fidelity Institutional Wealth Services, assets on their alternative products platform grew 50% in 2009. In a study of 200 RIAs, more than half plan to increase their allocation to alternatives, including hedge funds, in 2010.

Advisors Face Knowledge Gap

An article in Financial Advisor Magazine, quotes a report from Cerulli, saying that while many alternative investments did poorly themselves, most still outperformed market benchmarks.
The Cerulli report shows that there is a lot of room to grow since most advisors haven’t used alternatives in clients’ portfolios: Fewer than 10% of advisors surveyed by Cerulli have put client money into hedge funds, limited partnerships, structured notes or private equity.  Slightly more advisors use commodities (15%) and managed futures funds (13%).
Some advisors are increasingly turning to their broker-dealer’s internal research teams through managed account programs that can offer client risk-profiling and incorporate a variety of strategies in one account, Cerulli found.



The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at craig@ezragroupllc.com