Investors’ demand for alternative investments is cooling, but financial advisors anticipate adding these assets over the long term to boost diversification, a Bank of America survey of financial advisors found. Alternative investments had a hot year in 2022 but are facing a slog in 2023 as equities rise – a move that makes sense since alts act as a hedge against stocks. Consider that the AGF U.S. Market Neutral Anti-Beta Fund (BTAL) climbed 19% last year, but it’s down more than 8% in 2023. “Survey indicates lower demand for alts in private wealth channel over [near term] but most still expect much higher allocations in 5Ys,” wrote analyst Craig Siegenthaler in a Thursday report. Last week, the firm conducted its quarterly survey of financial advisors and received responses from 159 individuals. More than 4 in 10 advisors reported “no change” or decreased demand for alts, the lowest level Bank of America has seen since beginning its survey in the first quarter of 2022. Long term, however, advisors report seeing demand for alternative investments. “The key driver of demand remains the diversification/correlation benefit,” Siegenthaler wrote. Private equity ranked No. 1 as the alt category with the strongest investor demand, followed by private assets in “investor friendly vehicles” such as private real estate investment trusts and business development companies. Both private REITs and BDCs can be attractive yield plays, but they come with a bevy of risks, including a lack of liquidity. In the world of income, just under half of advisors are rotating client deposits into higher yielding money market funds, while about 34% are raising cash and liquidity due to market uncertainty, Bank of America found. Indeed, retail money market fund assets grew to $1.99 trillion during the week ended June 21, according to the Investment Company Institute . That’s an increase of $6.66 billion. Yields in these funds are still attractive, with the Crane 100 Money Fund Index posting an annualized 7-day current yield of 4.92% as of June 22. Bank of America predicts that when volatility normalizes, advisors will reduce the amount of cash they’re squirreling away for clients, but they will continue to sort into higher yielding liquid products – like these money market funds. — CNBC’s Michael Bloom contributed to this story.
