Institutional investors are increasing capital allocations to alternative strategies in a quest for strong returns in the low-interest-rate environment, according to a new study from BNY Mellon.
The report, Split Decisions: Institutional investment in alternative assets, produced by BNY Mellon in association with FT Remark, found that among the various alternative asset classes, private equity is most favoured by institutional clients, accounting for 37 per cent of their exposure, followed by infrastructure (25 per cent), real estate (24 per cent), and hedge funds (14 per cent).
According to the study nearly two-thirds of investor respondents said that alternatives had delivered returns of at least 12 per cent last year, while more than a quarter said the strategies had earned 15 per cent or more.
“Alternatives continue to gain share in portfolios, but institutional investors are becoming more selective about where and how they deploy their capital,” says Frank La Salla, CEO of Alternative Investment Services and Structured Products at BNY Mellon. “As a result, they are demanding greater transparency from their alternative fund managers. This survey reinforces the notion that investors and fund managers alike will need growing levels of support, insight and data to make informed decisions.”
According to the report, 39 per cent of respondents say they will increase their allocations to alternative investment types, while just 6 per cent say they will moderately decrease it. When it comes to private equity investments, 62 per cent of respondents say they will look for lower management fees and 55 per cent say they will request more transparency as they seek to optimize value.
Distressed strategies meanwhile, are the most attractive when it comes to hedge fund allocations, with 68 per cent of investors currently having exposure to them and 58 per cent ranking them as one of the three most attractive strategies for the coming 12 months.
The report also reveals that fee pressure from investors is leading 78 per cent of hedge fund respondents to say that they will consider reducing their management fees over the next 12 months, while emerging markets, on average, now make up 31 per cent of institutional investors’ alternative allocations. APAC-based investors account for the highest EM share at 54 per cent of their alternative portfolios, followed by investors in EMEA at 29 per cent and the Americas at only 16 per cent.
“The continued growth in alternative allocations will be supported by a steady stream of new products and strategies as fund managers cater to increasing amounts of capital headed toward alternative assets,” says Jamie Lewin, managing director and head of manager research at BNY Mellon Investment Management. “Innovation and adaptability will be two key differentiators that determine which firms succeed in capturing what’s become an integral part of institutional portfolios.”
A BNY Mellon survey released in May, prepared in collaboration with Preqin, showed that a significant percentage of infrastructure, real estate and private equity managers expect their assets under management to grow by at least 50 per cent by the year 2020. That study found that global demographic and macro-economic shifts are driving an unprecedented need for investment in real assets such as transport facilities, communications networks, housing and hospitals. In addition to institutional investors, the report also suggests high net worth and retail investors are likely to become a more important source of capital in the next five years.
For the Spilt Decisions paper, BNY Mellon commissioned FT Remark to survey 400 senior executives from institutional investors around the world, including pension funds, investment managers and insurance funds, to understand their approaches for allocating capital to alternative investments. At the same time, FT Remark also interviewed 50 hedge fund executives to gain insight into how they are reacting to a changing regulatory environment and rising demands from their institutional investor clients.