Tradex Global’s Four “Sell Signs” For Alternative Investments

The Tradex Group Weekly Blog

January 7, 2013

By Michael Beattie, Chief Investment Officer

Tradex Global’s Four “Sell Signs” For Alternative Investments

New data from Morningstar says that investors want to learn about alternative funds, but want more information on the topic. How about four, sure-fire “sell signs” that will have investors signing onto alternative investments without missing a beat?

How can fund managers satisfy that demand, and attract more client assets to alternatives? Let’s take a look.

Roll back to 2008, when the U.S. economy nearly collapsed, and the financial markets suffered their worst losses in decades.

But like most disasters, there was a silver lining. The toxic, roiling 2008 financial markets taught investors a good lesson about the importance of non-correlated investment returns. Increasingly, investors began to see alternative funds, especially hedge funds, as a solid, stable, relatively low risk investment vehicle.

While the S&P 500 lost 38% in value that year, hedge funds only fell by 19%, raising eyebrows all over Wall Street and among the investor community.

Since then, the growth of alternatives have exploded.

What’s attracting investors to alternative investments? And what should investment firms push on the sale and marketing front to attract more clients? Here are some ideas:

Sell liquidity – For years, alternatives were considered an illiquid investment, with hedge fund investors growing accustomed to seeing their assets “locked up” for long periods of time. But with the growth of liquid hedge funds, and from the growth of long and short funds, it’s easier for investors to get their cash in a pinch. That makes alternatives a great selling point to investors who may not know the liquidity story behind hedge funds.

Sell the growth of alternatives – Assets are pouring into alternative investments. According to a 2012 study from McKinsey & Co., worldwide alternative investment assets reached $6.5 trillion. The growth rate for alternatives has grown by seven times more than of traditional asset classes. McKinsey says that by 2015, alternative investments will comprise 25% of all retail investment class assets.

Sell the risk benefits – Alternatives offer a rich diversity of risk categories for different investors. More affluent investors are a good sell for hedge funds or traditional private-equity funds. Regular investors can be steered toward long and short mutual funds, and to exchange traded funds.

Sell the correlation benefits – Investors are drawn to alternative investments as investment returns provide a lower correlation than traditional stocks and stock mutual funds. Alternatives also allow investors to diversify their investment portfolio by industry or sector; by portfolio manager, or by investment strategy.

Couple all that with solid investment returns, and investment firms have an easier sale than they might think with alternative investments.  

And 2013 should be no different.