Advisers will have to put more emphasis on alternative assets as the economic crisis continues, according to the head of Bank of America Corp.'s alternative investment arm.
David Bailin, the president of Bank of America Alternative Investment Solutions, a unit of the Charlotte banking company, said B of A advisers are "tilting" investors more toward alternative products.
Typically an investor's portfolio will have anywhere from 10% to 40% in alternative investments. "In this current environment, we are increasing the allocation but staying in that range," Mr. Bailin said in an interview.
"We really believe that we have an opportunity to be tactical," he said. "In this environment, we have to take advantage of the opportunities that are presented to us."
That means investing in distressed debt ("more in Europe and Asia today than in America"), global macro strategies, and in strategies that expose investors to currencies, commodities, and interest rate movements, Mr. Bailin said.
Other investment opportunities include corporate turnaround and event-driven strategies, high-yield debt, and emerging-country debt, he said.
Advisers need to help customers develop a diversified alternative investment portfolio with "exposure to lot of different opportunities, because that way you have reduced risk and greater probability for strong returns," he said.
"Advisers have to revisit asset allocations completely right now," he said. "There are so many investment opportunities in the alternative space."
Analysts said most investors are unhappy with traditional investments and thinking of investing more in alternative products.
"It makes good sense to have alternatives in the arsenal," said Geoffrey Bobroff, an analyst with Bobroff Consulting in East Greenwich, R.I. "But still, there are no guarantees that alternative managers will do much better in the current environment."
In a May survey of 400 high-net-worth investors with more than $3 million of investable assets, Mr. Bailin's unit found that many of those who held alternative investments in the past 12 months were more satisfied with their alternative investments — including hedge funds, venture capital, real estate, and private equity — than with traditional investments of stock and bonds.
Thirty percent were satisfied with their traditional investments, 51% were satisfied with their investments in hedge funds, 44% with venture capital, 41% with real estate, and 35% with private equity.
Investors with 10 or more years of experience in alternative products were almost twice as likely to be "extremely satisfied" as those with fewer than 10 years' experience, the survey found.
"Our study demonstrates that alternative investors recognized that even in stressful market conditions, alternative investments are an important component in an overall portfolio and can help mitigate portfolio volatility," Mr. Bailin said.
Individual investors using alternative investments tend to work closely with an adviser, he said. "Investors are seeking out advisers to help them mitigate risks. An adviser is essential to help build a well-allocated portfolio that includes alternative products."
Mr. Bobroff said wealthy individual investors are pleased with their alternative investments because they are still generating strong returns. "Whether that will hold up in the post-credit-crisis era remains up in the air," he said.
"From a business standpoint, it is difficult to say whether advisers will continue to perform well," Mr. Bobroff said. "Looking at hedge funds, that market has not performed as well, because so many strategies are quantitatively driven, and quantitative managers have had a tough time in this environment."
Bank of America Alternative Investment Solutions is advice-driven, offering nonproprietary products.
Mr. Bailin said the unit, which had nearly $8 billion in alternative assets, has had growth in the "high teens" in the past 12 months.
Bank of America said negative publicity surrounding hedge funds has not discouraged most "experienced hedge fund investors." When asked if the publicity affected their investment decisions, 44% of those invested in hedge fund vehicles said no and 20% said yes.
Fifty-five percent of respondents with investments in hedge funds said they were not deterred by the possibility that they would lose more money than they could afford to by investing in such funds. Ten percent said they were afraid.
"The number of respondents who say they avoid hedge funds out of fear has been described as a trend by some industry watchers," Mr. Bailin said. "However, experience with alternative investments and access to advice seems to have overcome fear, according to the survey findings."
Investors who use alternative investments, he said, have a "realistic understanding of the risks associated with their holdings and realize that large alternatives managers are institutional in their investment approach and the quality of their investment professionals."
Though the number of alternative investment products has risen "exponentially" in the past five years, he said, "there are few easy ways for investors to assess fund performance or manager talent." The industry needs to work harder on educating investors, strengthening performance reporting, and "providing standardized information to enable investors and their advisers to make better investment decisions," he said.
