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Advisors indicate that they allocate 10.5% to alternatives and plan to increase this exposure to 11.8% in two years. While it was perceived that the COVID-19 pandemic would provide an opportunity for alternative managers to distinguish themselves by providing downside protection and capture flows through a tough market environment, this was not the case given the short-lived nature of the drawdown. Instead, the majority (53%) of advisors reported their overall alternative investments remained neutral.

Liquidity remains one of the more formidable challenges as listed by 54% of advisors. The liquid alternatives often available to advisors are hedge-fund-type trading strategies and not the private equity offerings they seek, the latter of which are largely unavailable to them. Beyond liquidity, Cerulli notes that advisors continue to find alternative investments expensive (39%) and complex (37%). Compared to low-cost (or no-cost) index funds, allocating to alternative investments cost significantly more, and can be notoriously difficult to explain. "Neither needs to be the case," remarks Daniil Shapiro, associate director. "Alternative exposures including commodities products and real estate ETFs, for instance, are available at low fees, and managers can work to simplify exposures and explanations to clients in a way that helps them identify strategy return drivers."

Cerulli believes that a playbook exists for managers and advisors. Both would benefit from a proliferation of quality alternative strategies but with some enhanced liquidity and certainly more attractive costs-60% and 43% of advisors, respectively, report these would lead to higher allocations-which would in turn help those strategies post better performance. For instance, convergence zone structures may present an interesting opportunity for managers to leverage their brand to offer attractive private exposures with intermittent liquidity. "Our research shows that advisors are increasingly interested and capable of investing across a broad range of alternative products," comments Shapiro. "However, to capture incremental flows, managers have to provide more attractive products that reflect advisors' needs."

As advisors look to increase allocations, Cerulli encourages wholesalers to use a consultative sales approach where they seek to understand advisors' needs and requirements as opposed to pushing specific products. "Advisors generally perceive wholesalers as knowledgeable and informed-a must for products that require tremendous education to receive an allocation," says Stacy Chitty, managing partner at Blue Vault. "It's possible that the firms best placed to take advantage will be those with a full suite of alternative products to which they can guide advisors depending on the needs of the end-client."