I am very encouraged by the key findings in our new White Paper – Split Decisions: Institutional investment in alternative assets. Most importantly, institutional investors expect to increase their allocations to the private equity, infrastructure, real estate and hedge fund asset classes over the next twelve months. Private Equity is leading the way as the most popular alternative strategy and accounts for 37% of investors’ alternative exposure and is also the segment that is set for the largest increase in allocations. Across the four asset classes, 39% are looking to increase their allocation in the next 12 months. Over half of those who responded (53%) said they would increase their allocation to private equity, 40% were planning to increase their investment in infrastructure, 36% to real estate and 26% to hedge funds. Our survey also gives hedge fund managers some useful insight into the investors’ thinking. There was a clear divide between those who focus on absolute return when investing in this asset class (43%) and the remaining 57% who look at investment in alternatives for diversified or non-correlated returns.
Positive investment performance emerges as a critical factor driving increased allocations and there are some very positive findings in the survey in relation to institutional investors’ perceptions here. Across all asset classes 93% reported that their alternative investment returns had either met or exceeded expectations in the previous 12 months. There were variations across the four classes but the feedback was resoundingly positive. A significant majority of those surveyed (65%) noted that alternatives had returned in excess of 12%, with 28% reporting performance of 15% or more.
Institutional investors are proving very influential in terms of driving product innovation and structural changes in the alternative industry. Across the board increased investment allocations are coming with a demand for increased transparency and liquidity, enhanced governance and lower management fees. A majority of investors are planning to discuss management fees in the next 12 months.
Each asset class is adapting to these demands in its own way. Private Equity managers are offering separate accounts which allow the investor to have greater control over the timing of capital commitments, greater transparency over investment activity and usually a lower management fee. Hedge fund managers are offering liquid alternative products or managed accounts as alternatives to the traditional fund structure. Liquid alternatives look set to take an increasing market share in the years to come as they can be distributed to both retail and institutional investors. Managed account platforms appeal to the institutional investor as governance and control is usually centralised with a specialist provider and daily reporting is available to allow for the effective monitoring of risk.
Our survey also took the opportunity to get a perspective from the hedge fund side and it is clear that there is a strong awareness of the demands of institutional investors. In fact the survey finds that over three-quarters of hedge fund managers are considering reducing their management and/or performance fees. This may result in tiered management fee structures becoming more prevalent. These fee pressures are leading managers to review what activities they are carrying out today which could be outsourced with a view to reducing operating costs. While much compliance monitoring and regulatory reporting activity is outsourced today, performance measurement looks to be one area where there will be increased outsourcing activity in the future.
Overall, this is a very welcome survey as it is clear that alternatives have become a core part of institutional investors’ portfolios. Institutional investors are driving positive change in the alternative industry as they look for increased transparency in investment activity, stronger corporate governance in terms of how funds are managed and more frequent access to their capital where strategies fall into the more liquid end of the spectrum. Equally positive is that managers are listening to institutional investors and responding to their needs by developing new products designed to meet these needs.
The report, Split Decisions: Institutional investment in alternative assets, was produced by BNY Mellon in association with FT Remark. It was launched at FundForum in Berlin on Tuesday 7th June 2016.