Advisors and institutions are turning to mutual funds as their choice du jour to access alternative strategies, according to new findings by Morningstar.
Alternative mutual funds saw inflows of $19.7 billion in 2012, while Morningstar estimates that among funds in its database, $7.6 billion flowed out of single-strategy hedge funds. While 61% of institutions said they accessed long-short strategies via hedge funds in 2010, only 26% indicated that they used hedge funds for that strategy this year. In contrast, more than 45% of institutions said they access long-short strategies via mutual funds versus 38 in 2010.
And there is more good news for alternative mutual fund shops. According to Morningstar, more than 20% of institutions, compared with 17% last year, said they expect alternative investments to make up more than 40% of holdings over the next five years. Only 4% of advisors said their typical client had no money in alternative investments, down from 17 percent in the 2008 survey.
“Alternative mutual funds and ETFs have grown in breadth and quality in recent years,” stated Nadia Papagiannis, director of alternative funds research for Morningstar, said. "Institutional investors are starting to see alternative mutual funds as substitutes for hedge funds, and more financial advisors are incorporating these liquid, transparent investments into their client portfolios."
Morningstar and Barron’s conducted the survey in March 2013 and received responses from 235 institutions and 471 financial advisors.