Alternatives Continue to Excite, Despite Recent Headwinds

Investors of all stripes are hoping alternatives can crack the asset allocation conundrum--provide investors with a truly uncorrelated asset that can keep pace with a balanced portfolio. Surveyed advisors and institutions in the 2011 Morningstar & Barron's alternatives investments' survey overwhelmingly agreed that diversification/low correlation was a key reason to take the plunge into alternative investments. How these investors define alternatives continues to evolve, however. This year we asked advisors and institutions whether they still considered commodities as part of their alternative allocation--they do. We also wanted to dive deeper into how advisors and institutions constructed their alternative investment process and glean what vehicles they use to deploy the array of alternative strategies at their disposal. Long/short, managed futures, market-neutral, multialternative, and nontraditional bond mutual funds all hit a record number of launches in 2011, and assets stand at a record $122.4 billion for alternative mutual funds and $145.5 billion for ETFs. 

However, the survey results show that advisor and institutional sentiment is cooling from last year's record excitement. The results are not surprising because many alternative strategies faced major difficulties in 2011, as managed futures were stung by strong momentum reversals, and equity-based strategies, such as long/short equity and market neutral, were hindered by record high correlations among stocks. The survey demonstrates the cautious optimism many investors are feeling toward the asset class, as investors position their portfolios to meet the demands of a post-recessionary environment.

Click here for survey results (pdf)>>