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SEI White Paper: Investor Demand Drives Growth Of Alternative Mutual Funds In U.S. And Europe

Investor Education and Strong Infrastructure Keys to Manager Success as Traditional and Alternative Investments Converge

OAKS, Pa., May 24, 2010 – In the wake of historic market losses and epic scandals, a restless and empowered investor base is demanding greater transparency and liquidity from managers, while focusing on absolute returns and uncorrelated investment strategies. This combination of factors is driving convergence of traditional and alternative investment products, with investors pouring more than $110 billion into alternative mutual funds in the U.S. and Europe in 2009 alone, according to a white paper released today by SEI (NASDAQ: SEIC) in collaboration with Strategic Insight. The paper, entitled Exotic to Mainstream: Growth of Alternative Mutual Funds in the United States and Europe, evaluates the opportunities and challenges managers face when launching and distributing alternative investment strategies in a registered mutual fund or UCITS format, as the trend toward “mainstream alternatives” gains significant momentum.

As evidenced by inflows to these alternative mutual funds, investor demand creates new opportunities for managers. For alternative firms facing a predominantly institutional investor base, offering their strategies in a mutual fund structure opens up a substantially broader and more diversified market opportunity. Meanwhile, traditional managers also see an opportunity for increased fund flows as well as potentially higher margin products and revenue diversification. According to the paper, however, managers must initially determine whether offering an alternative mutual fund can be accommodated within their investment parameters and whether it fits their branding and long-term business strategy. Managers must also address key regulatory, operational and distribution considerations before diving into these new investment products.

“The balance of power may have shifted in this ‘Era of the InvestorSM’, but if managers position themselves properly, convergence may offer an opportunity for them,” said Phil Masterson, Managing Director for SEI’s Investment Manager Services division. “Alternative mutual funds create new market opportunities, new revenue opportunities, and new product offerings that can meet the evolving needs of investors in today’s environment.”

A diverse group of strategies and managers are already experiencing success with these products in the U.S. and Europe. Successful strategies include long/short, global tactical asset allocation, volatility arbitrage, and managed futures. Sponsors are geographically dispersed across the United Kingdom, France, Sweden, Switzerland, and the U.S.

According to the paper, while it’s difficult to precisely measure the market opportunity for these vehicles, the potential appears to be significant, as evidenced by intermediaries modifying their model portfolios and recommended lists to accommodate alternatives – typically at the expense of the equity portion of the portfolios. In 2009, investors poured more than $110 billion into alternative mutual funds, with the largest flows going into long/short, market-neutral, commodity, and currency funds. A more detailed breakdown is as follows:

  • Approximately two-thirds of these net new flows ($75 billion) went into alternative-style U.S. mutual funds and ETFs, and one-third ($35 billion) into European mutual funds (UCITS) and ETFs.
  • Nearly 5 percent of U.S. retail alternative mutual funds and ETFs had net inflows of $1 billion or more in 2009; in contrast, approximately 3 percent of all traditional long-term U.S. mutual funds and ETFs had inflows exceeding $1 billion.

The white paper provides additional insights on growth opportunities, market factors and challenges facing managers in the current environment. The paper is published by the SEI Knowledge Partnership, in conjunction with Strategic Insight. The SEI Knowledge Partnership provides ongoing business intelligence to SEI’s investment manager clients. To request a copy of the 24-page white paper, please visit www.seic.com/AltMutualFundGrowth.

About SEI's Investment Manager Services Division

SEI's Investment Manager Services division provides comprehensive operational outsourcing solutions to global investment managers focused on mutual funds, hedge and private equity funds, exchange traded funds, collective trusts, and separately managed, as well as institutional and private client, accounts. The division applies operating services, technologies, and business and regulatory knowledge to each client’s business objectives. Its resources enable clients to meet the demands of the marketplace and sharpen business strategies by focusing on their core competencies. The division has been recognized by Buy-Side Technology as “Best Fund Administrator” and by HFMWeek as “Best Funds of Hedge Funds Administrator.” For more information, visit www.seic.com/ims.

About SEI

SEI (NASDAQ:SEIC) is a leading global provider of outsourced asset management, investment processing and investment operations solutions. The company’s innovative solutions help corporations, financial institutions, financial advisors, and affluent families create and manage wealth. As of March 31, 2010, through its subsidiaries and partnerships in which the company has a significant interest, SEI administers $394 billion in mutual fund and pooled assets and manages $162 billion in assets. SEI serves clients, conducts or is registered to conduct business and/or operations, from numerous offices worldwide. For more information, visit www.seic.com.

About Strategic Insight

Strategic Insight is a leading research firm for the fund and wealth management industry, providing clients with industry data and consulting services for product, distribution and business strategy decisions. Strategic Insight assists over 250 firms worldwide, and its Simfund databases and analytical platforms cover more than 70,000 funds around the world. For more information, visit www.Sionline.com. The company’s parent, Asset International, is an information provider to financial-services institutions, including asset managers, global pensions, and others. Find out more at www.AssetInternational.com.