While the “fear gauge” that tracks market volatility has remained at elevated levels since the onset of the pandemic, those who allocate alternative investment dollars for large investors are showing no signs of skittishness, according to the Alternative Investment Allocator Survey conducted by leading law firm Seward & Kissel.
The survey found that allocators are likely to increase allocations to less liquid strategies and continue to embrace emerging managers in 2021. The full survey is available here.
The survey analyses the views of individuals from pension funds, endowments, family offices, seeders, high-net-worth individuals, and others. Asked how their organisations’ allocations across a wide range of alternative investments would change in 2021, on average 42 per cent of participants anticipated their organisations to increase allocations to at least one strategy and 54 per cent said they would maintain their allocations, while just 4 per cent said their allocations would decrease. The strategies for which participants expect to increase allocations to in 2021 were primarily less liquid strategies typically utilised by closed-end funds with private equity, private credit, and venture capital accounting for the top three of the four strategies of interest for increased allocations, followed by equity hedge.
At least 50 per cent of each investor type surveyed also indicated that their organisations currently allocate to emerging managers (those founded less than two years ago). Fund-of-funds and seeders were most open to emerging managers, at 100 per cent, and pensions sat at the low end, at 50 per cent. In another strong sign of industry confidence, nearly 50 per cent of survey participants expected their average allocation size to exceed USD25 million.
Of the different ways that allocators invest, direct fund investments were the most popular across all investor groups, with 86 per cent of respondents using them, followed by separately managed accounts at 30 per cent, and co-investments at 28 per cent.
Over 60 per cent of participants indicated that their firms do not currently allocate to cryptocurrency or futures strategies, while over 40 per cent also indicated they do not have allocations to quantitative, macro, or infrastructure strategies.
Asked to identify their organisations’ most important consideration in making allocations, respondents cited investment strategy/process most frequently (86 per cent), followed by manager’s track record (55 per cent), and pedigree (53 per cent).
About three-quarters of respondents cited favourable fees as the most sought-after term when negotiating side letters, well more than any other request.
Seward & Kissel Investment Management Group partner Steve Nadel, the lead author of Seward & Kissel’s 2021 Alternative Investment Allocator Survey, says: “Our inaugural survey shows the continuing robust interest in alternative investments by a diverse group of investors.
“The expressed interest in emerging managers appears to signal that the world has changed significantly since the pandemic, in terms of alternative investment marketing. It is now much easier for newer managers to somewhat level the playing field by getting their message out through Zoom and other video conferencing tools. And, more importantly, many allocators appear to be getting comfortable with this form of communication.”
“Of the 11 investment strategies we polled about, five of the top six where allocators indicated an expected allocation increase in 2021 were less liquid, closed-end strategies.”