Survey Finds Widespread Use of Alternative Investments Among Institutions and Financial Advisors

Morningstar, a leading provider of independent investment research, and Barron's, a premier business and finance magazine, released highlights of a recent national survey examining the perception and usage of alternative investments among institutions and financial advisors.

"Our survey found that both institutions and advisors want alternative investments that are liquid, transparent, and regulated like traditional investments," said Steve Deutsch, director of separate accounts and collective investment trusts at Morningstar. "This demand is driving the convergence of traditional and alternative money management. We're seeing more alternative investment strategies in mutual funds and ETFs, higher prevalence of retail and alternative money managers competing for assets under management, and traditional money managers acquiring, merging with, or recruiting alternative investment expertise."

Among the survey findings:

For Institutions

-- Limited partnerships, including hedge funds, direct real estate, and private equity, are the most popular alternative vehicles for institutions.

-- Almost half of institutions surveyed allocate more than 10 percent of their portfolios to alternative investments, and nearly 20 percent allocate more than 25 percent of their portfolios to alternatives.

-- Institutions generally expect their portfolio allocations to alternative investments, particularly hedge funds and private equity, to increase over the next five years. Close to a quarter (23 percent) of institutions expect to invest more than 25 percent of their portfolios into alternatives.

-- Previous excitement seen over 130/30 and all manner of leveraged net-long investment strategies appears to have diminished. More than 70 percent of institutions expect assets invested in leveraged net-long strategies to remain unchanged in 2009.

For Advisors

-- Advisors are predominantly investing in alternative investments through liquid, regulated, and transparent vehicles like mutual funds and exchange-traded funds (ETFs), but they're also employing other non-traditional investments with their clients, like oil and gas limited partnerships, non-traded Real Estate Investment Trusts (REITs), church bonds, and equipment leasing.

-- Among advisors who work with average individual investors, almost 80 percent use alternative investments with some clients. About 40 percent of advisors had more than half of their higher-net-worth clients in some alternative investments.

-- Most advisors, approximately 70 percent, have no more than 10 percent of individual investors' portfolios devoted to alternative investments. About half of advisors allocate more than 10 percent of higher-net-worth clients' portfolios to alternatives.

-- Excitement about 130/30 funds also appears to have cooled among advisors. The majority of advisors (86 percent) do not expect to increase investments in these funds next year.

"We conducted this survey during one of the worst market downturns in history, where traditional U.S. and international investments plummeted and almost no alternative investments provided safe haven. One particularly interesting survey result was that against this backdrop, the majority of both advisors and institutions still reported that they expected to increase usage of alternative investments in the future, and they believed alternative investments will continue to grow in importance versus traditional investments," Deutsch added. "Recent poor performance of alternatives has not caused advisors or institutions to question their usage."

Morningstar and Barron's conducted the Internet-based survey in October 2008; 252 institutions and 1,180 financial advisors participated. The complete survey results appear in the Nov. 10 issue of Barron's and online at Barrons.com. Further survey results, including charts, can be viewed online at global.morningstar.com/2008Alternatives.

About Morningstar, Inc

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of Internet, software, and print-based products and services for individuals, financial advisors, and institutions. Morningstar provides data on more than 290,000 investment offerings, including stocks, mutual funds, and similar vehicles. The company has operations in 18 countries and minority ownership positions in companies based in three other countries.

About Barron's Magazine

Barron's is a premier weekly financial magazine providing market analyses and insights on companies, industries, sectors, the economy and financial markets in the United States and around the world. For 85 years, Barron's has delivered comprehensive statistics on the preceding week's trading and financial activities as well as feature stories and columns that look ahead at what's likely to happen to companies and to the market.

Alexa Auerbach, 312-696-6481, alexa.auerbach@morningstar.com

SOURCE Morningstar, Inc.