Shifts underneath the surface of institutional alternative asset allocations
BY Staff | November 15, 2019
While the amount of alternative assets in institutional portfolios is holding relatively steady, the type of investments making up allocations to alternatives are shifting.
Current allocations to alternatives rose just one per cent to 25 per cent since 2018, according to the latest research from EY. While hedge funds remain the largest contributor to the alternatives segment of the portfolio, its status is shrinking somewhat, sitting at 33 per cent of alternative allocations in 2019, down from 40 per cent.
“Muted performance, continued scrutiny of costs and competition from other products have resulted in lacklustre demand,” the study found.
Meanwhile investments in real estate and private equity are on the rise, chipping away at hedge funds’ market share. Private equity jumped to 25 per cent of alternatives in 2019, up from 18 per cent, while real estate allocations grew, but more gently, rising to 23 per cent from 20 per cent in 2018.
In strategizing for future growth, institutional investors are increasingly aware of the value brought by having a team with diverse skills and backgrounds managing their alternative assets, the study said.
While asset growth was the top concern for the most hedge fund and private equity firms, talent management was quite high on the list.
“Diversity in background and skill sets may not have been at the top of managers’ agendas for much of the past decade; however, we are seeing significant changes in that sentiment heading into the future and believe that diversity and inclusiveness will be one of the most pressing business priorities of the 2020s,” the study said.
Looking further to growth, hedge funds and private equity managers are continuing to offer products outside their core competencies to capture a wider client base among the investor community, the study found.
Of non-traditional offerings, 58 per cent of hedge funds offer co-investment vehicles and best idea portfolios. As well, 37 per cent of hedge fund managers and 41 per cent of private equity firms offer illiquid credit, private credit, collateralized loan obligations, or senior debt in fund structures. Meanwhile 23 per cent of private equity firms are offering venture capital opportunities.
“Credit strategies continue to grow in popularity among all managers as these products often blur the lines between hedge and private equity investment and operational philosophies,” the study said. “Compared with 2016 when only 18 per cent of managers reported a credit offering, we now see over double the number participating in this space.”
Expanding further, alternative asset managers are increasingly crossing international borders in pursuit of new business.
“The accumulation of wealth in different geographies and newer participation in alternatives by various investor bases has made it critical that managers have strategic plans as to how to best access and market these potential investors,” the report said.
Indeed, 46 per cent of private equity firms said they’d established a legal entity in a new jurisdiction in the past two years, while 30 per cent of hedge fund managers said the same. In addition to seeking access to more investors, many alternative fund managers also said tax structuring and accessing investment opportunities that required a local presence were reasons to expand geographically.
“Many of the top locations for legal offices reflect traditional market considerations,” the report said. “U.S.-based managers are most likely to have operations in the U.K. and continental Europe, and European-based managers are most likely to tap the U.S. and other European countries. Looking ahead to the trend that may affect the next wave of geographical expansion is managers’ desire to access the wealth and investment opportunities of China. Approximately one in 10 U.S. and European managers has indicated they have operations in China with more seeing this as a future strategic priority.”