Fidelity building alternatives unit to meet demand for diversification

Given treacherous market conditions and sagging returns for equities and bonds, Fidelity Investments' newest investment unit — Fidelity Diversifying Solutions — is building out its alternative investment lineup to meet investors' need for more investment diversification to provide better returns.

Demand from institutional, retail and adviser client segments is high given their thirst for performance, said Vadim Zlotnikov, the Boston-based president of the diversifying solutions unit, in an interview.

Fidelity Investments launched Fidelity Diversifying Solutions in October and recently received approval and registration for two mutual funds — Fidelity Global Macro Opportunities Fund and Fidelity Risk Parity Fund — by the Securities and Exchange Commission.

Investment launch dates for the mutual funds and all of the unit's new strategies have not been set.

"Retail and registered investment adviser demand for liquid alternatives is huge. Fidelity is far from the first mover here, but they have the capital and market understanding to make it a success," said Amanda Tepper, CEO and founder of money manager consultant Chestnut Advisory Group LLC, Westport, Conn., in an email.

She noted that "Fidelity is a behemoth on the defined contribution marketplace which is one market segment that remains, for all intents and purposes, structurally closed to any type of illiquid alternatives today. I assume that Fidelity's unit will seek to build products that can work on DC platforms."

Ms. Tepper said Fidelity can charge higher fees for alternative investment strategies and added that "between the growth of alternatives and the rise of passive investing, Fidelity's historic powerhouse products of active equity and fixed income are becoming smaller and smaller parts of investors' portfolios across all client segments," hence part of Fidelity's reason to add new strategies.

Getting to the point where Fidelity does have strategies ready for investment may take some time given that the diversifying unit of the Boston-based firm still is under construction in terms of hiring employees, creating three strategy buckets and lining up the delivery of these investment strategies.

Overall, Fidelity is on a hiring spree to add 250 new asset management employees to its asset management, part of an overall increase of 12,000 new employees by the end of the third quarter.

"The concept is to offer alternative investments as a complement to equity and fixed income," Mr. Zlotnikov said, adding that the logic behind the creation of the new unit is to "streamline the process to provide alternative investment solutions that have the right investment return streams in the right vehicles."

Mr. Zlotnikov also is president of two other units — Fidelity Asset Management Solutions and Fidelity Institutional Asset Management. He reports to Bart Grenier, head of asset management.

The business unit's three investment categories are diversifying sources of return in which portfolio managers will invest in market-neutral equity, merger arbitrage, fallen angels and alternative risk premium, among other investments; active allocation, including actively managed global tactical asset allocation; and protective strategies, which will use derivative-based strategies to provide downside protection from inflation risk and declines in equities, Mr. Zlotnikov said. He stressed that investment diversification has long been part of Fidelity's institutional investment offerings, including in target-date funds, OCIO, variable annuity and insurance strategies, but as one example, active allocation "only now is considered a stand-alone product."

Fidelity Diversifying Solutions will offer its dedicated alternatives in three ways, Mr. Zlotnikov said.

In addition to 40-Act mutual funds, the unit will offer limited partnerships with longer-dated investments and multiasset or stand-alone strategies for institutional investors, including customized strategies.

Mr. Zlotnikov said Fidelity will hire subadvisers to manage diversifying strategies investment offerings "when necessary if we don't have internal expertise."

He added that even though Fidelity's diversifying unit has yet to offer its new strategies to investors, he is seeing interest in the alternative funds from endowments, foundations and defined benefit plans.

As of March 31, Fidelity managed a total of $4.3 trillion in discretionary assets and $11.3 trillion in assets under advisement.

Institutional assets under management totaled $2.03 trillion as of Dec. 31, the most recent data available.