Invest But Reform: Smarter Finance for Cleaner Energy
Traditional asset managers and alternatives specialists are eagerly contending for an outsize share of a rapidly growing industry.
October 2015 | by Robert Harris
The boom in alternative investments presents something of a paradox. On one hand, money has continued to pour into alternatives over the past three years. Assets hit a record high of $7.2 trillion in 2015. The category has now doubled in size since 2005, with global assets under management (AUM) growing at an annualized pace of eleven percent—twice the rate of traditional investments. New flows into alternatives were seven percent of total assets in 2015, dwarfing the 1 to 2 percent rate of nonalternatives. Every alternative asset grew, especially direct hedge funds, real assets, and retail alternatives sold through registered vehicles like mutual funds and exchange-traded funds (ETFs).
Curiously, though, alternatives have enjoyed this growth at a time when their returns have generally lagged behind the broader market indexes. The average hedge fund, for instance, produced an 11 percent return in 2013, while the S&P 500 index soared by thirty percent. Skeptics contend that if returns stay sluggish, investor patience will wear thin, and the alternatives boom will run out of steam. However, our new research clearly indicates that the boom is far from over. In fact, it has much more room to run. In late 2013 and early 2014, we surveyed nearly 300 institutional investors managing $2.7 trillion in total assets and conducted more than 50 interviews with a cross section of investors by size and type.
The vast majority of institutional investors intend to either maintain or increase their allocations to alternatives over the next three years. Interest is especially keen among large and small pension funds (though not midsize funds) and sovereign-wealth funds. Wealthy individuals are also moving rapidly into the market, as new product vehicles provide unprecedented access to retail investors. As firms get larger, their organizational challenges will naturally grow; listed companies will also have to negotiate the tricky balances between the needs of shareholders and clients. And the growth of alternatives will only exacerbate the industry’s need to attract and retain top-flight talent.