Here's one of those rare times when an investment consultant tells it like it is.

In this case, it is Mannik Dhillon, managing director and global head of manager research for Wilshire, who spoke at the IMCA 2014 National Conference held at the Hynes Convention Center in Boston.

Dhillon, who leads a team of 70 researchers who help advise clients on roughly $1 trillion in assets, spoke to advisors and other conference attendees on what he has seen in client demand for investment products, and what he does to suss them out.

First off, Dhillon noted some major tectonic changes in the industry with regards to asset allocations. For example, the big shift among institutional clients toward alts and global/international equities.

Dhillon presented statistics culled from polling clients and consultants with regards to over $3 trillion in assets, and from these results he noted an average 6.9 percent increase in alt asset allocations to 15.1 percent. He also noted a 13.9 percent increase in allocations to non-U.S. equities to 19.4 percent.

In fact, Dhillon said that 54 percent of institutional allocations have gone to alts managers since 2011, translating into $94.6 billion in commitments. Meanwhile, equity and fixed income have gotten $79.6 billion.

Dhillon named the usual suspects as drivers for the alts: a desire by clients to diversify, avoid correlations and mitigate downside risk.

He said that many institutional clients were using '40 Act products to access alts because they were cheaper, with a flat known fee, and were transparent enough that they could choose these products without necessarily going to a hedge fund specialist. For example, small pension plans may not afford staff just to monitor their hedge fund investments.

"These are a very realistic and plausible solution for introducing alts into a portfolio," Dhillon said of alt mutual funds.

He estimated that alts mutual funds had exceeded $330 billion in AUM since the end of 2013, up from $136 billion in 2006. Over 600 alt funds had been launched since 2006, he estimated.

Picking alt funds is not easy, he warned. There are increased due diligence requirements for complex investment strategies. There are few established track records, and many of these funds fail and shut down outright.

"You have to keep your finger on the pulse of that universe," he said.

One of the strategies he uses to monitor these mutual funds: use the same people who research the hedge funds of these managers.

What do they look for? Diversification of risk and ability to find alpha potential in less efficient markets. Cap diversification and geographic diversification is value, he said.

When he finds managers with genuine skill, Dhillon often advises clients to take away some of the handcuffs in the investment mandates and look at unconstrained products, giving the good managers some freedom to tap into quick opportunities.

In the past, Dhillon said that fixed income clients were moving slowly from core assets to core plus, finding managers that would invest lightly in non-traditional fixed income assets.

Now, he says, more clients are looking for niche players in unique categories.

When it comes to evaluating funds, Dhillon said that qualitative analysis is important. For example, his team conducts over 2,000 meetings with managers each year.

However, he said it's important that clients have a quantitative process to test the story provided by the fund managers.

For Dhillon and his team, that includes analyses into consistency during rolling periods and regime-based peer analyses to make sure that the managers don't freak during black swans.

He and his colleagues also look at how much a manager can actually get beyond Brinson attributes.

"Having a quantitative check to your gut check is very important," he said.

Dhillon and his colleagues also devote a great deal of time to determining whether managers actually have the skill to seize alpha and capitalize on the inefficiencies they claim to have skill in.

Sometimes it's easy. Dhillon is usually skeptical when a long-only shop decides to try long-short. The skill sets, he says, are very different, making it hard for a specialist in one to quickly develop an expertise in the other. 

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