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.
• 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.
(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
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