Alternative investments are rapidly moving into the mainstream retail market but traditional asset managers have yet made the changes necessary to capitalize on this boom, according to a report released by McKinsey & Co.

The report states that year-end 2011 AUM for global alternatives reached record levels of $6.5 trillion, having grown at a five-year rate of over seven times that of traditional asset classes. Further, by 2015, retail alternatives are expected to account for one-quarter of retail revenues (even allowing for declining revenue yields) and a majority of revenue growth as "retail investors, confronted with volatile financial markets and the underfunding of their own retirements, follow the path blazed by institutional investors."

Fueling this trend, the report says, is a shift in investment frameworks from relative to absolute return and a convergence of traditional and alternative asset classes, investment managers and products.

However, McKinsey says that in order to tap managers need to undergo a number of changes in their internal operations, including such changes as ramping up risk management and product expertise.

The firms will also have to undergo a number of changes in their sales and distribution operations.

These would include process changes such as focusing on advisor segments selling alternatives and offering incentives away from grows flows to revenues. Traditional managers would have to upgrade the technical expertise and value-added services to better compete with alt-specialists.

For example the report said that institutional investors rate specialist alternatives managers more highly than traditional managers in two crucial areas: risk management and technical product expertise of the sales force. However, they rate both traditional and specialist managers poorly on overall understanding of client needs. On the retail side, where traditional asset managers have established relationships with retail distributors, over 60 percent of the RIAs surveyed primarily use specialist managers for their alternatives products. In addition to calling for better pricing, RIAs believe traditional asset managers need to clarify product and strategy.

 

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