Advisors who aren't discussing alternative investments to their clients should begin now that the demand is high, a new research by Baird Private Wealth Management. 

In the study "Demystifying the Role of Alternative Investments in a Diversified Investment Portfolio," increased market volatility and the fact that alternative assets are low or non-correlated to the market are the main reasons why investors are taking a preference toward them. This is all the more evident following the global banking crisis in 2008.

"Excluding precious metals funds, the Morningstar Alternatives Category has doubled in three years, expanding from 129 funds to 245 funds and assets of $37.8 billion to $70.7 billion funds as of 30 June 2011," said Laura Thurow, the co-director of private wealth management research, in a press release. 

Educating clients about alternative assets can give advisors the competitive advantage. According to Thurow, alternative investments may be split into two general categories: approaches that diversity beyond traditional long-only investing, such as private equity, funds of hedge funds, and managed futures, and vehicles to gain or hedge traditional long-only market exposure, as with structured products, exchange traded funds, and hedging strategies. 

"We've seen a 180 degree change in the availability of alternative products and solutions over the last 10 years. As a result, more than 75 per cent of our clients today have some alternatives in their portfolios, up from 10 per cent to 15 per cent just five years ago," said Thurow. 

"Since many of these products, and their risk factors, are new to clients, a logical approach for advisors is to tread lightly for now, using alternatives more for diversification than alpha generation," she added.

Thurow recommends advisors take a multi-manager approach to presenting alternatives, use to determine the right asset allocation by client, with a typical safe allocation range of below 20 per cent. 

"The asset class is hardly immune from bad timing and investors who fail to consider historical valuation measures. It’s important that advisors counsel their clients to be patient and know what they are getting into and how their investments may perform in different market environments before they invest," she concluded.