Liquid alternatives are the most popular way for financial advisors to access to alternative strategies, but new research from a consulting ally to asset managers suggests that liquid alts they may soon be overshadowed by their less liquid cousins.

Michael "Mike" Evans Fuse Research Network Partner, Director of Advisor and Benchmark Research

Yesterday Mike Evans, director of BenchMark research at Fuse Research Network, highlighted that finding from "Alternative Products: The Advisor View" report, the latest installment in the Needham, Massachusetts-based firm's Advisor Trend Monitor Series. The Fuse team published the first edition of the report in 2014, with a number of editions since, including one in December 2023. The latest edition of the Alternative Products: The Advisor View report draws on a survey of 541 advisors.

The Fuse team finds that a majority of FAs say they're using liquid alts today, while less liquid alternatives (especially digital assets, like cryptocurrency) are not as widely used. Yet when FAs look ahead, fewer of them expect to be using liquid alts two years from now, while more of them (though not quite a majority) expect to be using various less-liquid alts.

The most popular alts offerings today, the Fuse researchers find, are publicly traded REITs, used by 59 percent of FAs, and that's followed by liquid alts mutual funds (used by 52.5 percent) and liquid alts ETFs (used by 50.3 percent). Yet only 43.6 percent of FAs expect to use liquid alternative ETFs in two years, only 39.6 percent expect to use liquid alternative mutual funds, and only 34.6 percent expect to use publicly traded REITs.

As for less liquid alts, the most popular structure today appears to be private equity, currently used by 36.2 percent of FAs, followed by private REITs (35.5 percent), private debt (31.8 percent), BDCs (29.8 percent), hedge funds (29.4 percent), interval and tender-offer funds (26.1 percent), and digital assets (20.7 percent). Yet all of those alts structures look set to gain popularity; looking ahead, 47.5 percent of FAs expect to use digital assets in two years, followed by private equity (46.2 percent), hedge funds (44.7 percent), private debt (43.4 percent), interval and tender-offer funds (42 percent), private REITs (41.2 percent), and BDCs (38.6 percent).

"The percentage of advisors using alternative strategies and structures has consistently grown over the last decade," Evans tells MFWire in an emailed statement:

A majority of FAs access alternatives through liquid strategies. However, a growing percentage have and plan to increase their use of semi- and illiquid alternatives. The bulk of FAs using true illiquid alternatives will come from the wirehouses and advisors/advisor teams with large books of business.

"Advisors are aggressively planning to increase their use of alternatives, especically in the illiquid and semi-liquid space. This will take time as underlying issues will complicate its implementation," Evans states. "Liquidity concerns, limited accessibility beyond wirehouse advisors and advisors with large books of business, client suitability as well as operational and compliance challenges will all hinder the speed of adoption across the broader retail investor market." 

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