Alternative investments remain squarely in the growth phase, with investors across the globe looking beyond absolute returns as they seek to incorporate liquidity needs, regulatory status and transparency in allocation decisions.
Meanwhile, the definition of what constitutes an alternative investment continues to vary by region and, to a greater extent, by organiation type. These dynamics create opportunities and challenges for helping investors fully understand their potential alternatives contributions.
These were among the key findings of a new Deutsche Asset & Wealth Management (Deutsche AWM) survey of investors. “The Alternative Perspective – 2014 Global Survey of Investors in Alternatives” surveyed 373 investment executives from a diverse set of organisations in Europe, Asia-Pacific and the Americas.
“Alternative investments have come into their own, taking a core position in an increasing number of portfolios. More than half of the Deutsche AWM clients whom we surveyed plan to increase their portfolio exposure to these asset classes, with funding most likely to come from cash and fixed income rather than from a reallocation between the various sub-sectors within the alternatives space,” said Dario Schiraldi, Deutsche AWM’s Head of Global Client Group. “Our 2014 Alternative Perspective survey points to a number of ways for alternative investments to validate and expand their role in asset allocation and risk management.”
The survey’s key findings include:
• Investors look beyond absolute returns. While investors expect private equity primaries, single strategy hedge funds, private infrastructure and private real estate to outperform, our survey reveals that liquid alternatives, multi-strategy hedge funds and private equity secondaries may command larger flows, as investors increasingly focus on factors other than absolute returns.
• Liquidity needs send investors down different paths. Liquidity needs vary by organisation type and region. Going forward, investors with high liquidity needs will increasingly turn to the expanding universe of liquid alternatives, while those with low liquidity needs will seek to capitalise on that flexibility in the form of higher potential rewards or better fee terms.
• Alternatives are in the eye of the beholder. Differences in the way firms define alternative investments are evident across regions, organization types and experience levels. As firms increasingly come to recognise the specific contributions each alternative asset class can bring to portfolio diversification, each could potentially earn its own allocation, as opposed to competing with each other for space within an overall alternatives allocation.
• ESG is rising in importance. Nearly half of the respondents indicated that Environmental, Social and Governance criteria play some role in their alternative investment process, with ESG implementation most evolved in Europe, followed by North America. As ESG takes on a larger role, firms will develop more structured frameworks for choosing managers who implement these criteria.
• One size doesn’t fit all when it comes to growth. Asia-Pacific arguably offers the most growth opportunity. Respondents from Asia-Pacific overwhelmingly say that they look to alternative asset classes to decrease correlations and improve diversification, versus their Americas and Europe counterparts, who use alternatives for a broad range of reasons ranging from risk reduction to returns enhancement.
• Fee pressure is likely to intensify. Fee negotiation is becoming more commonplace, with investors pushing for better terms based on arguments including being a Day 1 investor and large ticket sizes. Investors across regions and organisation types say that the most persuasive argument for a reduction in fees is industry standard pressure.
