Interest in alternatives is rising as investors look to manage volatility – and advisor education is critical to meeting that tidal wave of demand.

That was the message delivered at a roundtable discussion on alternatives hosted this week in New York by Fidelity Investments.

Alternative investments, also known as alts, include everything from commodities to long/short funds. They have been used for years by institutional and high-net-worth investors as a way to dampen volatility within a portfolio, but now they are getting greater attention from advisors and retail investors.

Larry Restieri, head of alternative sales at Goldman Sachs Asset Management, told roundtable participants that this is a good time for advisors to consider alts as equity markets struggle to reproduce last year’s gains and as expectations for returns from fixed income diminish.

“If you look over time, the fixed income part of your portfolio has really driven returns.  But in the near and medium term we are expecting rates to rise, and the fixed income part of your portfolio may not yield much or might actually give negative returns,” Restieri explained.

Adding alts to the mix can even out the highs and lows, he added. “You can get to your return objective in a less volatile way.”

But advisors and their clients are less familiar with this category, impeding its adoption.

“In the retail space, not only are they new products for the clients, they are also new products for the advisor. Many have never sold alternative investments before,” noted panelist Josh Charlson, director of alternative funds research for Morningstar.

Matthew Brown, CEO of CAIS, an exchange for financial products and research, sees advisor education as key to introducing alternatives to a greater number of investors.

“Arming the advisor to make informed decisions is of the utmost importance. We don’t want to bring new products to advisors who don’t really understand them and aren’t comfortable with them,” Brown said.

In 2013, 22% of net mutual fund inflows were into alternative investment mutual funds, as defined by Morningstar, noted Michael Diamond, Fidelity’s vice president of product management.

That has led Fidelity to undertake a campaign promoting awareness and understanding of alts among advisors and broker-dealers. The Boston-based investment firm launched an alternative investments platform last October to provide FAs with easy access to alternative investment products, such as hedge funds and private equity funds, and to research from CAIS, Goldman Sachs Asset Management and Morningstar. Fidelity, which has $2 trillion in assets under management, is also hosting a series of regional education conferences for RIAs and broker-dealers.

“We’re talking with them about how to implement alternative investments in portfolios, and how to talk about them with clients,” Diamond told the panel.

Goldman’s Restieri expects alternatives to quickly become a feature of mainstream investing. “Five years from now, it’ll be a natural part of people’s portfolio,” he says. “A lot of this is about education, but this is going to happen fast.”

Morningstar’s Charlson said that research conducted by the firm last year showed that broader diversification, low correlation and improved risk-adjusted returns were the main reasons investors and advisors were attracted to alts.

“We’re in the early innings,” said Charlson, “but those are very good reasons for using alternatives and they’re not going away. Growth is going to continue.”

 

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