An "empowered investor base" insisting on more transparency and liquidity from managers, as well as absolute returns and uncorrelated investment strategies, has led to a spike in demand for alternative mutual funds, a report concluded.

American and European investors funneled more than $110 billion into the alternative strategies in 2009, according to SEI, which issued the report with Strategic Insight.

The paper, "Exotic to Mainstream: Growth of Alternative Mutual Funds in the United States and Europe," assesses opportunities and challenges for managers using alternative investment strategies in a registered mutual fund. It argues that the trend toward "mainstream alternatives" has gained momentum. Investments in noncorrelated assets have traditionally been dominated by institutional investors.

In particular, investors are interested in absolute-return, enhanced cash, portable alpha, 130/30 funds, global tactical asset allocation, hedge funds, alternative strategies and UCITS, Jag Alexeyev, SI senior managing director, head of global research, told Money Management Executive in a recent interview.

The SI/SEI whitepaper also underscores the need for managers to determine whether their investment parameters can accommodate an alternative mutual fund and whether "it fits their branding and long-term business strategy."

Managers also have to address regulatory, operational and distribution considerations before launching an alternative investment product. Having a distribution team that is informed about alternatives and has the infrastructure to support the mutual funds is also essential.

"These are more complex and more difficult to understand, so it's important to educate advisers about how to use these products," said Adam Patti, the chief executive of IndexIQ, which launched alternative mutual funds in March 2008 and June 2009. IndexIQ was also responsible for the first no-load, open-end hedge-fund-replication mutual fund ever listed in the U.S.

Patti said his Rye Brook, N.Y., company makes monthly and quarterly conference calls with clients and potential clients about the funds to familiarize them with the products. It also publishes a monthly newsletter detailing the portfolio's performance.

"It's important that you have the right people in the field who aren't walking brochures, but can actually explain these things and think them through," Patti said.

Retail investors, registered investment advisers and independent advisers have become more interested in alternative investments in recent years, Patti said.

However, "transparency, liquidity and fees" have been issues for institutional investors, he said.

(c) Copyright 2010 Money Management Executive and SourceMedia Inc. All rights reserved.

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