Retail investors have been sluggish in re-entering the alternatives and multi-asset market, according to Lonsec's 2010 review of the sector.
The review - which included fund of hedge funds, multi-manager alternatives and multi-asset alternative funds - found the sector has not seen much in the way of retail inflows over the past 12 months.
"A significant number of retail investors had their investment frozen, gated or wound up during the global financial crisis and have only recently gained access to their funds," Lonsec senior investment analyst Deanne Fuller said.
"As a result, retail investors have been slow to re-enter the market."
However, Fuller said demand from institutions has been more favourable.
"On the back of improved market performance and investor sentiment, liquidity has returned to the sector, with all funds now open to applications and redemptions," she said.
In recent years, Lonsec has witnessed increased interest in low-cost, index-style hedge funds, Fuller said.
"Investors have long been attracted to the low correlations associated with underlying hedge fund returns, but consider the 2 per cent plus 20 per cent (management fee plus performance fee) fee structure to be too expensive," she said.
The distribution of ratings in Lonsec's annual review of the alternatives and multi-asset sector had a distinctly positive skew, Fuller said.
"This is due to Lonsec's focus on reviewing a selective list of higher quality offerings, as opposed to simply rating a large number of products in this space," she said.
Lonsec reviewed nine funds, with one - the Fauchier Partners Absolute Return Trust - attaining Lonsec's highest rating of highly recommended.
The HSBC GH Diversified Strategy Fund was added to the list in this review, receiving a recommended rating.
