Low Yields Pushing Investors To Alternative Funds

And cheaper, passive alternative funds are gaining interest, says new research

Editor, etf.com Europe
Reviewed by: Rachael Revesz
Edited by: Rachael Revesz

Rock-bottom yields have pushed investors to seek income further afield, including so-called “alternative” funds, once associated with opaque hedge fund strategies and high fees, according to new research, while cheaper, passive alternative funds are reaping the rewards.

In a report published yesterday by Boston-based research house Cerulli Associates, there are around 500 alternative funds, including retail-friendly hedge funds which are offered on direct-to-consumer platforms in Europe. Assets under management in these funds have grown more than 50 percent since the end of 2011 to €255 billion as of the end of June 2015.

Despite the investor interest, Cerulli recommends actively-managed alternative funds to drop their prices to gain even more inflows.

"With active funds having a hard time justifying their fees when passives perform just as well, alternative funds may find it even harder," said Barbara Wall, Europe research director at Cerulli. "Asset managers might also consider dropping the performance fee, especially if it's just for outperforming cash."

One expensive example is Aberdeen Asset Management’s Liquid Alternatives Fund, which launched in August and costs 1.7 percent. It fell 0.15 percent in August, compared to global equities’ loss of 6.8 percent.

"This is the sort of uncorrelated performance investors might be prepared to pay for, though it would have to be sustained over a longer period," added Wall.

Cerulli also called for more transparency with alternative funds, and cited potential confusion for retail investors over the fund’s heavy use of derivatives.

A passive fund like an ETF or index tracker shows the investor what they are holding, however, Brian Gorman, an analyst at Cerulli, added that active funds choose to hold back on some information:

"Fact sheets often fail to provide the details of such matters, with managers arguing the information would serve no purpose.”

At the end of the second quarter this year global ETP assets overtook those of hedge funds, further evidence that passive funds are reaping the rewards post crisis.




Rachael Revesz joined etf.com in August 2013 as staff writer. Previously an investment reporter at Citywire, she has a background in writing content for retail financial advisors and has covered a wide range of subjects in finance. Revesz studied journalism at PMA Media, which has since merged with the Press Association. She also holds a B.A. in modern languages from Durham University, as well as CF1 and CF2 financial planning certificates from the CII.