Unlocking Real Value Blog

Full Steam Ahead For Retail Alternatives – Trouble Ahead?

Hardly a day goes by that you don’t see another fund company jumping further onto the retail alternative investments bandwagon. While this news is not all negative, as some firms are upgrading their educational capabilities along with their product offerings, I still fear that we are seeing the newest bubble in the financial services industry.

When everyone climbs on board to avoid presumadly being left behind, my worry antenna rises. I have nothing against alternative investments; they have been a very successful diversifier for many institutions and institutional investors for years. But I have also seen my share of very sophisticated investors who don’t understand them.

The latest onslaught of retail alternative investments news included:

1) AllienceBernstein has begun its largest ever alternative investments marketing campaign – which includes a road show targeted at major broker/dealers and investment advisor firms. On the positive side, their new website does include a quiz to test financial advisors on their knowledge of liquid alternatives.

2) In the past year, according to Cerulli Associates, fund companies added more sales positions related to alternative investments than any other area. More than 40 firms were interviewed for the study. The general belief is that more salespeople are needed to sell alternatives because it is a more difficult sale than more traditional investments.

But these trends back the idea that supply is leading demand. Despite all of the efforts of fund companies to grow this marketplace, with large numbers of new funds continuing to be introduced, growth remains slow. Again according to Cerulli Associates, alternatives represent just 2% of mutual fund assets.

Lack of track records and high fees, explain part of this phenomenon, along with the previously mentioned lack of advisor and investor knowledge in this area. But it worries me that fund companies continue to push and push, and invest and invest, and the question remains what the demand really is.

I don’t doubt the efficacy of the asset class, particularly for institutions. I do, however, question whether this retail push is indeed positive for individual investors. There are enough alternative investment funds out there for those investors who understand them and desire them. There is no lack of supply. Shouldn’t the lack of demand be telling us something? Are we going to listen to what the market tells us? Or are we going to strive to increase profitability at the expense of doing the right thing (again)?

I fear that the answer is not the one that is best for investors.

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