High Net Worth & The Emergence of Alts

A simple equation: Principal, diversification, returns

NEW YORK, March 5, 2014 – High Net Worth (HNW) investors on the hunt for diversification and better investment returns are increasing their exposure to alternative investments and pulling cash off the sidelines to do it. However, a large percentage of investors still require more education and guidance to capitalize on the opportunity – according to “Investing Outside the Box,” a new study on trends in non-traditional investing from MainStay Investments, a New York Life company and Barron’s Top Fund Family*. The study was conducted by Harris Interactive among a nationally representative sample of more than 800 HNW investors ages 40-65.

“Allocations into alternatives are growing as HNW investors are taking a closer look at their investment returns and diversification goals, and learning how alternatives can fit into a smart asset allocation strategy,” said Stephen Fisher, president of MainStay Investments. “However, with 39% of respondents reportedly lacking confidence in their knowledge of alternatives, there’s a real opportunity to bridge the information gap.”

Use of Alternative Investments on the Rise

Among the key findings, HNW investors using alternatives, on average, have more than one-fifth of their portfolios (22%) invested in alternatives. One quarter of these investors (26%) see their exposure to alternatives increasing over the next five years by an average of 2.9 percentage points. Another 66% believe their level of exposure will remain the same.

Those who already invest in this asset class are reallocating from cash and money market accounts (61%), followed by equities (44%) and fixed income (22%). And three-in-five HNW investors—who are currently using alternatives in their portfolios—have increased their investment over the past year (62%).

Diversify, Grow, Protect

The study further reveals HNW investors are looking to alternatives for diversification (50%) and investment growth / return potential (48%). Three-in-five HNW investors (60%) also view protecting principal as a key role of alternatives.

Interestingly, commodities are the most commonly held alternative investment, followed by private equity and long/short equity: Commodities (48%), Private equity (39%), Long/short equity (36%), Hedge funds (34%), Managed futures (30%).
And the most common method for investing in alternatives is through mutual funds (65%), followed by ETFs (40%) and managed funds (38%).

“Non-traditional investments are increasingly becoming the norm for HNW investors,” said Matthew Leung, head of channel marketing strategies at MainStay Investments. “In fact, 51% of the investors we surveyed agree that within the next five to ten years, alternative investments will become more mainstream and will be considered a core holding in many investment portfolios.”

Investors Satisfied, Once Knowledgeable

An overwhelming majority of investors who have used alternatives say they would recommend using alternatives to other investors (88%). Alternative investments have been beneficial for most HNW investors both in terms of their experiences and results:

  • Two-thirds say including alternatives in their portfolios has been positive (67%).
  • The same percentage report that the effect on their portfolio has been net positive (67%).
  • Notably, ultra HNW investors (greater than $3 million in investable assets) feel even better about alternatives, with 75% saying alternatives have been net positive for their portfolios.
Interestingly, commodities are the most commonly held alternative investment, followed by private equity and long/short equity: Commodities (48%), Private equity (39%), Long/short equity (36%), Hedge funds (34%), Managed futures (30%).

Among HNW investors, the most sought out methods for investment ideas and education about alternatives have been from: advisors (60%), the internet/financial web sites (41%), and research papers/reports (35%).

Understanding Risk is Key – Bridging the Information Gap

Concern about risk is the biggest factor holding HNW investors back from using alternatives more broadly in their portfolios. In fact, half of those who do not invest in alternatives today (49%) say it’s because they view alternatives as too risky.

Moreover, a majority of investors feel there is not enough information available on alternatives to allow them to evaluate their benefits as part of a portfolio (61%). As they look to learn about alternatives, investors who are working with financial advisors are primarily looking for information about potential risks (73%) and a description of how these investments work (71%).

“In a market environment that remains unpredictable, investors need to become more knowledgeable about the benefits of including non-traditional strategies into a traditional diversified portfolio,” said Mr. Fisher. “At MainStay, we believe exposure to many different and uncorrelated assets can result in enhanced diversification and help investors achieve their investment goals more efficiently.”

For more information about MainStay’s study “Investing Outside the Box” please visit here.

 

 

 

Methodology
New York Life MainStay Investments commissioned Harris Interactive to conduct an online survey of 806 HNW investors from October 24th to November 11th, 2013. All respondents were U.S. residents, aged 40-65 with at least $1 million in investable assets (not including the value of their home.)

About MainStay Investments
With over $97 billion in assets under management as of December 31, 2013 across retail mutual funds and variable product sub-accounts, MainStay Investments is the mutual fund distribution arm of New York Life. MainStay provides financial advisors access to a powerful mix of autonomous, institutional investment managers, delivered by people who understand the needs of today’s financial advisor. As an indirect subsidiary of New York Life Insurance Company, a Fortune 100 company founded in 1845, MainStay is owned by the largest mutual life insurance company in the United States** and one of the largest life insurers in the world. Please visit MainStay’s website at www.mainstayinvestments.com for more information.