Key Takeaways
- • Financial advisors allocate significantly less capital to liquid alternative funds than market fundamentals and product availability would suggest, according to a Cerulli Associates report released in July 2020.
- • Liquid alternatives are designed to deliver positive absolute returns with low correlation to stocks and bonds, yet uptake remains weak despite advisors' stated need for portfolio diversification and downside protection.
- • Cerulli recommends asset managers shift strategy away from complexity and premium fee structures, instead competing on simplicity, cost efficiency, and transparent positioning similar to passive management models.
- • The CAIA CEO highlighted in October 2019 that market conditions favored alternative investments as the extended "risk-on" phase of equity markets appeared to be nearing an end—a thesis that gained relevance as COVID-19 volatility emerged months later.
- • High fee structures and opaque product complexity remain structural barriers to advisor adoption, despite liquid alts' institutional use spanning decades.
Summary
Financial advisors continue to underallocate to liquid alternative funds despite widespread availability and their stated investment objectives, according to research from Cerulli Associates cited in July 2020. The disconnect between advisor recognition of liquidity alternatives' utility and actual capital deployment reflects a persistent gap in the alternative investment marketplace.
Liquid alternatives are designed to deliver positive absolute returns across most market conditions while maintaining low correlation to traditional equity and fixed-income securities. These attributes position them as natural portfolio diversifiers, particularly relevant during periods of market stress. Bill Kelly, CEO of the Chartered Alternative Investment Analyst Association (CAIA), made this case explicitly in October 2019, noting that "there is a sense that the extended 'risk-on' phase of the stock market may be nearing an end"—an assessment that proved prescient as market volatility accelerated in early 2020.
Despite decades of institutional adoption and significantly increased product availability, advisors remain hesitant to recommend liquid alternatives to clients. Daniil Shapiro, an associate director at Cerulli, stated bluntly: "Advisors allocate far less to alternative exposures than would be expected, especially given the increased availability of the products and advisors' reported need for diversification and downside protection."
The research firm attributes weak adoption to structural impediments within the industry. Liquid alternative funds typically charge above-average fees and feature complex strategies that advisors struggle to explain and position to clients. To reverse this trend, Cerulli recommends that asset managers fundamentally reshape their product development strategy. Rather than pursuing capability-intensive offerings, manufacturers should "compete on simplicity and costs as opposed to a capabilities arms race," according to Shapiro. This approach mirrors the successful shift toward passive management, where lower fees and transparent methodologies drove rapid adoption. Asset managers should prioritize developing products with coherent exposures, reduced cost structures, and lower risk profiles to unlock advisor demand.
Liquid alternatives are designed to deliver positive absolute returns across most market conditions while maintaining low correlation to traditional equity and fixed-income securities. These attributes position them as natural portfolio diversifiers, particularly relevant during periods of market stress. Bill Kelly, CEO of the Chartered Alternative Investment Analyst Association (CAIA), made this case explicitly in October 2019, noting that "there is a sense that the extended 'risk-on' phase of the stock market may be nearing an end"—an assessment that proved prescient as market volatility accelerated in early 2020.
Despite decades of institutional adoption and significantly increased product availability, advisors remain hesitant to recommend liquid alternatives to clients. Daniil Shapiro, an associate director at Cerulli, stated bluntly: "Advisors allocate far less to alternative exposures than would be expected, especially given the increased availability of the products and advisors' reported need for diversification and downside protection."
The research firm attributes weak adoption to structural impediments within the industry. Liquid alternative funds typically charge above-average fees and feature complex strategies that advisors struggle to explain and position to clients. To reverse this trend, Cerulli recommends that asset managers fundamentally reshape their product development strategy. Rather than pursuing capability-intensive offerings, manufacturers should "compete on simplicity and costs as opposed to a capabilities arms race," according to Shapiro. This approach mirrors the successful shift toward passive management, where lower fees and transparent methodologies drove rapid adoption. Asset managers should prioritize developing products with coherent exposures, reduced cost structures, and lower risk profiles to unlock advisor demand.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.