Fidelity And BlackRock Are Creating More Alternative Investment Funds - Here's Why

For decades, many retail investors allocated their portfolios among standard choices like stocks, bonds and mutual funds that have exposure to those traditional asset classes. Currently, many traditional rules of thumb, including the 60%/40% stock-to-bond portfolio, are becoming somewhat obsolete.

Looking to diversify from traditional markets and beat inflation, investors, financial advisers and traditional brokerages are turning to alternative investments. These options can include derivatives like futures contracts on commodities; private equity; blockchain; environmental; social and governance (ESG); and international investments. 

Because of these factors, liquid alternative funds are on track to break last year’s record of $38.3 billion worth of net inflows.

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Alternative Investments Can Justify Higher Fees

Several decades ago, it wasn’t uncommon for stock brokerages to charge 8% per trade. The internet, index funds and robo-advisers have shifted the model, with most leading brokerages offering commission-free trades on U.S. stocks and ETFs. 

Many financial advisers charge asset under management fees (AUM), which can range from 0.20% to 2% to manage a client’s portfolio. 

Currently, many advisers have to deal with fee compression, since the average client account fee in 2021 was 0.69%. Some investors rely on their own research or on robo-advisers like Betterment for financial planning. Betterment charges a fraction of the AUM fees an adviser would charge, starting at 0.25%.

Many alternative investments, including private equity and real estate, require more strategy and can carry higher risks. Unlike index funds, alternative investment ETFs may be actively managed. 

One of the main reasons that brokerages are creating these funds is that they can justify charging higher management fees along with performance-based fees.

For example, the ProShares Global Listed Private Equity ETF PEX is a popular ETF that invests in private equity companies and carries a whopping 2.67% expense ratio.

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Brokerages Can Diversify Revenue Streams

U.S. stock mutual funds were very common in investors’ portfolios. Because of high fees, commissions and underperformance, many investors are choosing low-cost ETFs and index funds instead. 

As a result, net inflows to U.S. long-term mutual funds have been negative for seven of the past eight years, per the Investment Company Institute. A good portion of these inflows is being allocated to lower-cost ETFs and index funds, which are less profitable for brokerages.

Offering alternative investment funds provides these companies with different, more profitable revenue streams. Unlike older mutual funds, alternative investment funds are seeing higher demand from both investors and advisers.

Per a 2022 CAIS Group survey, 34% of participating advisers thought that a traditional mix of stocks and bonds is no longer effective for investing.

Fidelity Launched Two Alternative Investment Funds

Fidelity has recently created the Fidelity Advisor Risk Parity Fund FAPZX and Fidelity Advisor Macro Opportunities Fund (FAQFX).

Fidelity Advisor Risk Parity Fund (FAPZX)

This fund invests in U.S. stocks, bonds, international stocks and debt, exchange-traded products and mutual funds. It also has exposure to futures contracts on commodities.

The five classes of this fund — A, M, C, I and Z — have expense ratios that vary, ranging from 0.64% to 1.69%.

Fidelity Advisor Macro Opportunities Fund (FAQFX)

Like the Risk Parity Fund, the Macro Opportunities Fund has five classes — A, M, C, I and Z, with expense ratios differing per fund class. These range from 0.80% to 1.85%. It also seeks to provide investors diversification from the traditional 60%/40% stock-to-bond portfolio.

The Macro Opportunities Fund differs from the Risk Parity Fund because it incorporates more leverage and uses a mix of both long and short positions among asset classes. These strategies ensure that it’s minimally correlated to traditional equity markets.

Other Asset Managers Are Following Fidelity’s Lead

Aside from Fidelity, other top financial institutions including BlackRock and Invesco have been creating more alternative investment funds. Some of these focus on specific, popular niches like blockchain or ESG. 

For example, BlackRock recently launched its iShares Blockchain and Tech ETF IBLC. This ETF invests in U.S. and foreign companies that are involved in the development and innovation of blockchain, along with crypto-based technology. 

Some of its largest holdings include Coinbase Global Inc. COIN and Marathon Digital Holdings Inc. MARA. Unlike other actively managed ETFs, it has a relatively low expense ratio of 0.47%.

Aside from blockchain, ESG is another growing niche. It’s becoming even more popular because of an increased interest in environmental sustainability and social causes. 

A third of Millennial and 19% of Gen Z investors prefer to invest in companies that favor positive social change, innovation and sustainability. Some household names like Microsoft Corp. MSFT and Apple Inc. AAPL qualify as ESG companies. 

While companies need to meet many standards to be considered ESG, the main one is that the company isn’t involved in business activities in the following industries — alcohol, cannabis, weapons, gambling, nuclear power, oil and gas and tobacco.

The Invesco ESG NASDAQ 100 ETF QQMG tracks the Nasdaq-100 ESG Index, and some of its holdings include Apple, Microsoft, DocuSign Inc. DOCU and Zoom Video Communications Inc. ZM. Since it’s an index fund, it has a relatively low expense ratio of 0.20%. 

Besides this ETF, which was launched in late 2021, Invesco offers other ESG ETFs, including the ESG Nasdaq Next Gen 100 ETF QQJG and the ESG S&P 500 Equal Weight ETF RSPE.

Traditional Brokerages Are Increasingly Creating Unique, Alternative Investments

The world and the markets are changing rapidly. Traditional investment strategies like the 60%/40% stock-to-bond portfolio are becoming more outdated, especially since this model is projected to have its worst quarter since 2008.

New industries including blockchain and ESG provide more innovation and investment opportunities, which explains why BlackRock has launched its iShares Blockchain and Tech ETF.

Other funds like the Fidelity Macro Opportunities Fund are being used to provide diversification from standard asset classes like U.S. stocks and bonds, which have realized significant losses this year.

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Posted In: Small CapMarketsAlternative investmentsBlackrockFidelity