Senior executives were surveyed from 450 large hedge funds and institutions, revealing 3 perspectives on portfolio management and alternative investing trends. Part 3.
The last few years have been interesting times indeed for institutional investors. Many, such as insurance companies, have faced increased regulation with higher capital adequacy ratios, and all have grappled with lower returns from more traditional investments as the low interest rate environment has persisted at a time of slow global growth.
Public markets have been subject to violent swings and oil prices have risen sharply only to fall back again to levels last seen a decade ago. Generating returns in such an environment is challenging and requires investors to consider three main avenues for achieving good outcomes for their portfolios. First, using leverage to magnify returns; second, identifying (and getting comfortable with) increasing concentration in specific sectors or investment styles; and third, moving down the liquidity spectrum to consider investments with long time horizons.
The various investments that make up the alternative investment landscape offer opportunities for some or all of these three return-boosting strategies, and that helps explain why alternatives are gaining ground in institutional portfolios, often at the expense of more traditional asset classes.
As our study shows, appetite for alternatives is set to rise further over the coming years. This is the result of strong returns generated by alternative strategies, both on an absolute and relative basis. However, our study also demonstrates that, despite the increasing flows of capital to alternative assets, fund managers have to adapt and innovate to attract a share of this. Investors may be keen on alternatives, but they are increasingly discerning about where and how they deploy their capital. Importantly, they are also acutely aware of the erosive effect of fees on their returns, which is exerting pressure on the traditional 2 and 20 model that alternative investment fund managers have become accustomed to.
These trends are leading to wide-ranging changes in the alternatives space, from the development of new products and structures such as managed and separate accounts, liquid alternatives in the hedge fund space and the rise of co-investments in private equity. We are also seeing a bifurcation between larger players that are seeking to offer investors a range of alternative strategies under one roof and those that are carving out a niche for themselves to specialize in a particular area or strategy.
The upshot, for investors, is an increasing array of choices in what was once a small corner of the investment landscape and is steadily becoming an integral part of the institutional portfolio. The alternative investment asset class is maturing – and it’s maturing fast.
As alternative asset classes rise up the allocation agenda, we investigate the current climate and look to the future.
Private equity has the largest share of exposure among institutional investors. We reveal investor attitudes to PE and what the future holds for the asset class.
We explore investor attitudes to hedge funds and what the future holds for the asset class.
BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may be used as a generic term to reference the corporation as a whole and/or its various subsidiaries generally. This material and any products and services may be issued or provided under various brand names in various countries by duly authorised and regulated subsidiaries, affiliates, and joint ventures of BNY Mellon, which may include any of the following. The Bank of New York Mellon, at 225 Liberty Street, New York, New York 10286 USA, a banking corporation organised pursuant to the laws of the State of New York, and operating in England through its branch at One Canada Square, London E14 5AL, England, registered in England and Wales with numbers FC005522 and BR000818. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the US Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon, London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon SA/NV, a Belgian public limited liability company, with company number 0806.743.159, whose registered office is at 46 Rue Montoyerstraat, B-1000 Brussels, Belgium, authorised and regulated as a significant credit institution by the European Central Bank (ECB), under the prudential supervision of the National Bank of Belgium (NBB) and under the supervision of the Belgian Financial Services and Markets Authority (FSMA) for conduct of business rules, and a subsidiary of The Bank of New York Mellon. The Bank of New York Mellon SA/NV operates in England through its branch at 160 Queen Victoria Street, London EC4V 4LA and is registered in England and Wales with numbers FC029379 and BR014361. The Bank of New York Mellon SA/NV (London Branch) is authorised by the ECB and subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from us on request. The Bank of New York Mellon SA/NV, operating in Ireland through its branch at 4th Floor Hanover Building, Windmill Lane, Dublin 2, Ireland, trading as The Bank of New York Mellon SA/NV, Dublin Branch, authorised by the ECB and registered with the Companies Registration Office in Ireland No. 907126 & with VAT No. IE 9578054E. If this material is distributed in, or from, the Dubai International Financial Centre (“DIFC”), it is communicated by The Bank of New York Mellon, DIFC Branch, regulated by the DFSA and located at DIFC, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE, on behalf of The Bank of New York Mellon, which is a wholly-owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Bank of New York Mellon, Singapore Branch, subject to regulation by the Monetary Authority of Singapore. The Bank of New York Mellon, Hong Kong Branch, subject to regulation by the Hong Kong Monetary Authority and the Securities & Futures Commission of Hong Kong. If this material is distributed in Japan, it is distributed by The Bank of New York Mellon Securities Company Japan Ltd, as intermediary for The Bank of New York Mellon. Not all products and services are offered in all countries.
The material contained in this document, which may be considered advertising, is for general information and reference purposes only and is not intended to provide legal, tax, accounting, investment, financial or other professional advice on any matter, and is not to be used as such. Information contained in this document obtained from third party sources has not been independently verified by BNY Mellon, which does not guarantee the completeness or accuracy of such information. The contents may not be comprehensive or up-to-date, and BNY Mellon will not be responsible for updating any information contained within this document. If distributed in the UK or EMEA, this document is a financial promotion.
This document and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. Investments in hedge and private equity funds and fund of hedge and private equity funds (collectively, “Funds”) are speculative, include special risks and may be suitable only for certain investors. There can be no assurance that a Fund’s investment objectives will be realized or that suitable investments may be identified. An investor could lose all or a substantial portion of his or her investment. BNY Mellon recommends that professional advice be obtained prior to using any product or service. Any performance, price or other data used for illustrative purposes may not reflect actual current conditions. Prior results do not guarantee a similar outcome. No representations or warranties are made, and BNY Mellon assumes no responsibility or liability whatsoever for any action taken in reliance on any information contained herein.
This document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country in which such distribution or use would be contrary to local law or regulation. Similarly, this document may not be distributed or used for the purpose of offers or solicitations in any jurisdiction or in any circumstances in which such offers or solicitations are unlawful or not authorised, or where there would be, by virtue of such distribution, new or additional registration requirements. Persons into whose possession this document comes are required to inform themselves about and to observe any restrictions that apply to the distribution of this document in their jurisdiction. The information contained in this document is for use by wholesale clients only and is not to be relied upon by retail clients.
© 2016 The Bank of New York Mellon Corporation. All rights reserved.