In its Alternatives Sector Review, the report found that many alternatives products have failed to perform as well as traditional long-only equity products.
“Over the last few years, the alternatives product space has faced significant regulatory change, both domestically and internationally,” said Lonsec senior investment analyst Stewart Gault.
“This regulatory scrutiny has been accompanied by increased demand from investors for greater transparency from the alternative investment sector,” he said.
“The traditional hedge fund investor base of family offices and high-net-worth individuals has been supplanted over time by large institutional investors, such as pension funds and sovereign wealth funds.
“Institutional investors typically have statutory or legal reporting requirements and so require greater transparency from their investments,” Mr Gault said.
According to Lonsec, investors are therefore demanding “less complexity, better liquidity and lower fees from the alternative investment sector.
Lonsec argued that such investor pressure is shaping the alternatives sector.
“While Lonsec believes there is a strong case based on diversification to include an allocation to alternative assets within a multi-asset portfolio, investors should be aware of additional risks associated with such allocations."
These include “reduced transparency, less or no reliance on traditional market beta to drive returns, and sometimes illiquidity,” the report said.
The report also found that the broad range of hedge fund strategies have led to significant variation in performance, with product returns ranging from -25.1 per cent to +24.8 per cent in the 12 months to November 2014.
