An “empowered investor base” demanding greater transparency and liquidity from managers, while also zeroing in on absolute returns and uncorrelated investment strategies, has led to a significant demand for alternative mutual funds in the U.S. and Europe, a new white paper finds.

In fact, 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, entitled Exotic to Mainstream: Growth of Alternative Mutual Funds in the United States and Europe, assesses the opportunities and challenges for managers utilizing alternative investment strategies in a registered mutual fund. The paper argues that the trend toward “mainstream alternatives,” has gained momentum. Investments in non-correlated assets have traditionally been dominated by institutional investors.

But the white paper from SEI and Strategic Insight 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 educated about alternatives and has the infrastructure to support the mutual funds is also a key.

“These are more complex and more difficult to understand so it’s important to educate advisors about how to use these products,” says Adam Patti, CEO of IndexIQ. The Rye Brook, NY-based firm launched alternative mutual funds in March 2008 and June 2009. It launched the first no-load, open-end hedge fund replication mutual fund ever listed in the U.S.

Patti says IndexIQ makes monthly and quarterly conference calls with clients and potential clients about the funds to help educate them about the products and what they do to the portfolio. The firm also puts out a monthly newsletter describing the performance of the portfolio.

“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 says.

He adds that he has seen considerable uptick in interest from retail investors in alternative investments in recent years. In fact, a tagline for IndexIQ is “democratizing alternatives.” The firm does not sell directly to retail investors, but has seen the same interest level increasing among RIAs and independent advisors, whom they market to.

“That’s one of the reasons we started the firm,” Patti explains. “We were seeing assets going to the institutional side of the market but there were clearly access issues. Transparency, liquidity and fees were things that had to be addressed.”

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