72% of Investors Looking to Increase Alternatives Exposure

This article aligns with our academic / institutional investing process: select managers focused on risk-adjusted returns and diversifying traditional portfolio strategies! *JB*

Institutional investors remain interested in alternative investments for 2017, with the sector holding their attention for a second year in a row, according to a survey by Context Summits.

The biggest market challenges they see for 2017 include uncertainty on the regulatory front, the Trump administration, and volatility in global markets.

According to John Culbertson, chief investment officer of Context Capital Partners, an investor in alternative avenues, although some of the largest funds saw net outflows in 2016, the hedge fund sector actually saw “its strongest performance in three years” as the markets responded to the UK’s Brexit vote and the election of Donald Trump in the US, “two major low-probability events that caused volatility spikes.”

Mark Salameh, co-founder of Context Summits, a New York-based organizer of events for the alternative asset management industry, reports, “These investors are seeking new managers that can produce strong risk-adjusted returns and help diversify a traditional portfolio from risks in equity and credit markets. The findings provide evidence that the alternative asset management industry continues to grow and mature, with new strategies and ideas entering the market every day.”

Some of the key trends the survey of allocators identifies are:

For 2017, 72% of investors are looking to increase their allocations to alternative fund managers, compared to 79% for 2016

About 68% of investors are looking to reduce their cash holdings by year-end, compared to 62% for 2016, showing their willingness to take on risk

Investors are looking to allocate money to an average of 5.49 funds

They are positive about alternative investments’ ability to generate risk-adjusted returns, with 51% of investors optimistic and 36% neutral

Investors are open to new ideas and plays, with 59% looking to allocate funds to newer “emerging” managers over established managers

The main metrics they use to evaluate fund managers are investment process, performance and assets under management. The factors they pay the least attention to are redemption and lockup terms, operations, and length of a manager’s track record.

Even though these investors are open to newer managers, they are looking for annualized returns of 10.9% on average from hedge funds.

Culbertson notes, “Going forward, we expect the next 12 months will serve as a critical marker for the role of alternatives in an institutional portfolio. Alternative managers and allocators need to adapt to proposed policy changes from the new administration, as well as react to concerns about interest rate normalization in the US and the implications of Brexit in Europe.”

More than 200 institutions – including fund of funds, endowments, pension funds and sovereign wealth funds – participated in the Context Summits survey, according to the company.

Tags: alternative investments, alts, Brexit, Context Summits, President Trump, survey

By Poonkulali Thangavelu.  Chief Investment Officer magazine, May 2, 2017