The lack of information available to investors about what fund managers describe as "alternatives" means they can’t be sure how much risk they are taking on, new research suggests. 

With the Retail Distribution Review (RDR) reinforcing the need for advisers to analyse the risk appetite of their clients and pick appropriate products, this issue could prove particularly troubling. 

Caspar Rock, chief investment officer of fund provider Architas, says that his team’s research into the mixed asset sectors shows that large amounts of clients’ money has been put in products perceived as high-risk, without investors being aware. 

Around 22 per cent of the assets held in alternatives are in different types of commodities, more than 20 per cent in hedge funds and more than 8 per cent in private equity. 

Rock claims this means advisers could be investing clients’ money in exactly the assets they want to avoid. 

"If a client says 'I don’t want commodities', can the adviser say that the product really doesn’t have a lot in them if they don’t know what is in the alternatives bucket?" he asked. 

"The 12 per cent held in alternatives in the average fund is probably bigger than the European equity exposure of the fund – when advisers are selling a fund do they really know what’s in it?" 

The information given by fund providers varies, and some do give a more detailed breakdown on the factsheets distributed. 

However, the data available to IFAs isn’t uniform, and is sometimes severely lacking, with most providers including a category of undefined assets, often differently described.

Architas’ research shows that as the risk profile of each sector increases, so does the volatility and the Beta of the assets recorded as alternatives. 

Rock says this needs to be considered by advisers as it means the effect on the performance of the portfolio will be different in each sector. 

The assets in private equity are particularly troubling in Rock’s view, as the sector is known for lacking in transparency and taking on leveraged risk.

Architas’ research involved a full analysis of the assets held in the four mixed assets sectors. On the broader view it revealed that 66 per cent of all assets in these sectors were collective investments and ETFs, underlining the growing dominance of the multi-manager approach. 

A further 18.66 per cent was in directly held equities, 9.45 per cent in directly-held bonds and 5.2 per cent in cash.