While advisors and investors have “significantly expanded” their alternative holdings since the financial turmoil of 2008, growth has started to decelerate due to the “lackluster” performance of alternatives relative to the overall market, says Scott Burns of Morningstar.

According to an annual survey from Morningstar and Barron’s, which examines perceptions and usage of alternative investments, approximately 65 per cent of advisors and 67 per cent of institutions said alternative investments were “as important” or “more important” than traditional investments.

“Growth has begun to slow, though, as investors have ramped up their allocations, and excitement may be cooling with the lackluster performance of alternatives relative to the overall market over the last few years,” said Burns, director of ETF, closed-end fund and alternative research at the firm.

While alternatives continue to acquire assets, inflows are at a lower level than in prior years. Last year alternative mutual funds logged inflows of $23.2 billion ($14.2 billion excluding the non-traditional bond category), down by $1.8 billion from 2010.

Shift in sentiment

Sentiment has "cooled to more established equity-based alternatives," but not to non-equity-based strategies such as managed futures and currencies, despite poor performance, the firm said.

For the second consecutive year, advisors cited managed futures as the asset to which they were most likely to increase their exposure. Currency funds, on the other hand, failed to feature in the top five.

Managed futures and currency mutual funds logged inflows of $3.6 billion and $3.4 billion respectively in 2011, even though managed futures actually lost 6.9 per cent during the same period, and while currency funds have depreciated every year since 2008.

Although advisors and institutions agreed that diversification was driving alternative investments, they cited high fees and lack of liquidity as barriers.

In recent years the proportion of advisors concerned about lack of liquidity has fallen sharply, from 60 per cent in 2009 to 40 per cent in the recent survey. This coincides with the launch of many new liquid alternative products, the survey report said. 

The survey was conducted in January and involved responses from 365 financial advisors and 264 institutions.