The overall trend of investing in alternatives is slowing down. But advisors’ use of alternative exchange-traded funds (ETFs) is expected to increase by 17% over the next two years. Investments in alternative mutual funds is projected to increase by 9%.
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The estimates are based on the Cogent Alternative Investment Trends report for 2012, surveying advisors with $5 million or more in assets under management.
Lower costs, increased liquidity, and greater transparency are usually the factors that drive advisors to choose ETFs for investing in traditional asset classes. Those are the same factors that are driving their use in the alternative space.
Currencies and commodities investing are the two most popular alternative strategies being deployed through ETFs. Advisors have much more control
in a currency ETF than they do in a currency mutual fund.
ETFs allow advisors to focus on specific currencies they think will outperform. ETFs are not actively managed so advisors must do the due diligence before choosing the currency they wish to invest in.
Mutual funds seem to be the vehicle of choice for investing in multiple strategies or managed futures. Those are the two investment strategies for which ETFs seem to be in short supply. That’s likely because the SEC has barred the use of derivatives in ETFs since 2010.
Overall, the use of alternative funds by advisors has dropped from 78% last year to 74%. ETFs and mutual funds have been popular investment choices for retirees wishing to earn better investment returns yet wish to avoid the long liquidity lockups associated with traditional alternatives like private hedge funds or private equity funds.