Some Advisers Choose Alternative Investments Using Poorly Suited Benchmarks, Says Morningstar

According to a survey issued by Morningstar Inc., financial advisers may be using the wrong benchmark when evaluating and choosing alternative investments. The research firm and Barron’s magazine questioned 301 advisers and 372 institutional investors.

Right now, the most popular way that advisers assess their investments’ performance is with a standard benchmark index and not by measuring performance against customized benchmarks, competitor funds, or risk-adjusted analysis. While about 25% are using the Russell 2000, the S & P 500, or similar benchmarks, the rest of those who were surveyed work with different methods.

Now, however, there are industry executives and analysts who are saying the index benchmarks are not up to the job of assessing the funds’ performance. Alternative investments typically employ different strategies and may have distinct goals.

For example, says InvestmentNews, a lot of long-short equity funds that participate in hedging and have a tendency to get into large-cap stocks are frequently measured against indexes, which are even more volatile than the actual funds. It seems that advisers are evaluating the funds using standards for products that are supposed to go beyond market benchmarks. Natixis Global Asset Management chief market strategist David Lafferty told Investment News that advisers should work with multiple risks measures, such as downside capture and maximize drawdown, to tell customers about investments.

Even with the misevaluations, assets in alternative funds have grown, exceeding $300 billion in May. Assets in alternative funds saw a 43% rise in 2013, making it the most rapidly growing mutual fund product. Nontraditional bond funds, long-short stock funds, and multi-alternative funds are among the fastest growing subcategories.

Morningstar’s survey showed that advisers have been turning toward alternative investments even with substantial gains in long-only equity market exposure. Almost a quarter of advisers admitted to allocating up to 15% of client portfolios in these investments. Over 75% of advisers said they wanted the diversification benefits, no correlation, and broader market returns.

Please contact our institutional investor fraud law firm today. The SSEK Partners Group represents investors who have sustained losses due to alternative investment fraud.

Some advisers using ill-suited benchmarks to measure alts performance, Investment News, July 7, 2014

Morningstar/Barron’s Survey


More Blog Posts:

Non-Traded REITs, Structured Products, and Private Placements Remain Under Regulator Scrutiny, Institutional Investor Securities Blog, July 7, 2014

Deutsche Bank, Wells Fargo, Citigroup Sued by Pimco and Blackrock Over Trustee Roles Involving Mortgage Bonds, Institutional Investor Securities Blog, July 3, 2014

SignalPoint Asset Management to PAY SEC Fine for Breach of Fiduciary Duty, Stockbroker Fraud Blog, July 7, 2014