Alternative investments such as hedge funds and real estate are becoming mainstream investments, while a new definition of "alternative inve...

Alternative investments such as hedge funds and real estate are becoming mainstream investments, while a new definition of "alternative investments" in North America could encompass capital-protected and structured products, commodity funds, and managed futures, according to a new survey by investment research firm Morningstar.

The study found that investors’ primary reason for hesitating when choosing alternative investments is a lack of understanding, followed closely by a lack of liquidity, and fees.

"The financial advisory industry knew anecdotally that the state of alternative investments had shifted, but we were surprised to find that the majority of advisors expect double-digit growth in alternative assets under management every year for the next five years," said Steve Deutsch, director of separate accounts and managed investments for Morningstar.

"The rise in usage indicates that financial advisors see alternative investments as smart financial choices for some of their clients, and that further transparency will help advisors and their clients gain confidence to consider adding these investment vehicles to their portfolios,” he said.

Morningstar surveyed 600 US financial advisors online in August when 67 per cent reported that more than 10 per cent of their client base are currently using alternative investments.

Most client portfolios typically have less than 10 per cent of their assets allocated to alternative investments, according to the survey.

Sixty-five per cent of financial advisors say they expect more than double-digit growth in alternative assets under management and the main driver of growth in alternative investments in the next five years will be capital-protected and structured products, as predicted by 28 per cent of advisors.