RESEARCH
                     
Advisors and Alternative Investments

Jun 2018

Advisors and Alternative Investments - CoverWe recently surveyed more than 450 advisors about their use of and perspectives on alternative investments. Our new research report shares how experienced advisors source and allocate to private equity funds, hedge funds and direct deals, the challenges that impact their ability to invest and their future plans for each asset type.

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Use of alternative investments varies widely depending on the business model of the advisor, but a majority of practitioners share common views on where and why to invest.

Private equity funds and hedge funds represent the largest alternative allocations within the modern wealth management portfolio, but interest in direct deals is projected to be higher than both asset types moving forward.

KEY FINDINGS

• Private equity (PE) funds are the most commonly used alternative investment, with 77% of advisors maintaining allocations, followed by hedge funds (61%) and private direct deals (15%).

• Almost half (48%) of wirehouse advisors maintain allocations to PE funds of between 5% and 10%, whereas over 70% of registered investment advisors (RIAs) and independent broker-dealers (IBDs), respectively, allocate less than 5% of total client portfolios to PE funds.

• Investment returns are the most cited reason for investing in alternatives across all asset types and advisor business models.

• Finding more appropriate clients is consistently cited as the most important issue impacting advisors’ ability to invest in alternatives.

• About half of independent advisors (both RIAs and IBDs) cite ease of access as a continuing issue impacting their ability to invest in PE funds and hedge funds, compared to less than one-in-ten wirehouse advisors.

• The vast majority of advisors (87%) intend to maintain or increase their private equity fund allocations over the coming year.

• While 54% of advisors plan to maintain their hedge fund exposure, 39% plan to invest less, although wirehouse advisors are more bullish on these investment strategies than their independent peers.

• Although participation in direct private deals is proportionately lower than other alternative asset types, advisors are even more enthusiastic about them with 93% looking to maintain or increase exposure over the next 12 months.

Demand for alternative strategies is growing as advisors seek to differentiate in an increasingly competitive market and investors look to maintain returns in a changing environment. Today, the traditional 60/40 portfolio comprised of public equities and fixed income is forecasted to generate about half of what it has historically with significantly more volatility1, creating a pressing need for new sources of diversification and growth in high-net-worth portfolios. Simultaneously, alternative investments such as private equity funds, hedge funds and direct private deals are becoming more mainstream. An October 2017 PwC industry report forecasts that alternative investments will surpass $21 trillion in assets by 2025, more than doubling in size in eight years and reaching 15% of all global assets under management2.

Much of this growth has been enabled by the rise of new technologies and platforms that have made it possible to efficiently aggregate thousands of individual high-net-worth investor commitments, thereby opening access to opportunities that previously were only available to large institutions. Advisors are increasingly taking advantage of these choices to o er a diverse range of alternative investments to their clients. However, certain obstacles to high-net-worth investment in alternatives identified in prior iCapital research, such as illiquidity, high minimums and access to high quality offerings, still exist. Varying levels of client wealth and legacy institutional structures also create differences in ease of access to alternative investments across traditional brokerages and independent advisory firms.

What is clear is that all types of advisors are increasingly interested in alternatives and looking for ways to incorporate new exposures and strategies, particularly private equity, into client portfolios. As increasing private wealth and an evolving alternative investment landscape continue to stoke advisor demand for these asset classes, we expect that innovations in technology and product offerings will further democratize alternatives for the high-net-worth market and serve advisors with more accessible solutions.

A 2017 PwC report forecasts that alternative investments will surpass $21 trillion in assets by 2025, more than doubling in size in eight years and reaching 15% of global assets under management.

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(1) Can a 60/40 Portfolio Still Produce Solid Returns?, Financial Advisor IQ, July 5, 2017

(2) Asset & Wealth Management Revolution: Embracing Exponential Change, PwC, October 2017; https://www.pwc.com/gx/en/asset-management/asset-management-insights/assets/awm-revolution-full-report-final.pdf


IMPORTANT INFORMATION

This material is provided for informational purposes only and is not intended as, and may not be relied on in any manner as legal, tax or investment advice, a recommendation, or as an offer to sell, a solicitation of an offer to purchase or a recommendation of any interest in any fund or security offered by iCapital. Past performance is not indicative of future results. Alternative investments are complex, speculative investment vehicles and are not suitable for all investors. An investment in an alternative investment entails a high degree of risk and no assurance can be given that any alternative investment fund’s investment objectives will be achieved or that investors will receive a return of their capital. The information contained herein is subject to change and is also incomplete. This industry information and its importance is an opinion only and should not be relied upon as the only important information available. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed, and iCapital Network assumes no liability for the information provided. This information is the property of iCapital Network. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.

Products offered by iCapital are typically private placements that are sold only to qualified clients of iCapital through transactions that are exempt from registration under the Securities Act of 1933 pursuant to Rule 506(b) of Regulation D promulgated thereunder ("Private Placements"). An investment in any product issued pursuant to a Private Placement, such as the funds described, entails a high degree of risk and no assurance can be given that any alternative investment fund’s investment objectives will be achieved or that investors will receive a return of their capital. Further, such investments are not subject to the same levels of regulatory scrutiny as publicly listed investments, and as a result, investors may have access to significantly less information than they can access with respect to publicly listed investments. Prospective investors should also note that investments in the products described involve long lock-ups and do not provide investors with liquidity.

Securities may be offered through iCapital Securities, LLC, a registered broker dealer, member of FINRA and SIPC and subsidiary of Institutional Capital Network, Inc. (d/b/a iCapital Network). These registrations and memberships in no way imply that the SEC, FINRA or SIPC have endorsed the entities, products or services discussed herein. iCapital and iCapital Network are registered trademarks of Institutional Capital Network, Inc. Additional information is available upon request.