So what conclusions can we draw from this data? The first is that the enthusiasm for alternatives is being driven by a desire for consistent positive return streams that are independent of market movements. This desire is leading to very high levels of asset concentration and an insensitivity to fees.
The poor performance of the broader alternatives universe undermines the argument that allocating to alternative funds in general should improve outcomes to investors over the long term, although they may be useful in controlling short term volatility.
Rather than focusing on adding alternatives exposure to a portfolio, advisers should instead focus their efforts on identifying the best funds. Having found these funds, avoid the temptation to chase short-term performance as that is likely to handicap already low returns. In essence, investors need an alternative to the current blind enthusiasm for alternatives.
Dan Kemp is chief investment officer of Morningstar Investment Management Europe
Key points
Investors are increasingly seeking an alternative home for clients’ capital
There is a concentration of flows and assets in a small number of funds
The enthusiasm for alternatives is being driven by a desire for consistent positive return streams
