The divide between the traditional and alternative investment worlds is blurring. Although still seen by some as ‘new’, liquid alternative assets are not only well established but growing at an impressive rate.
This FundForum Asia session set out to give an assessment of the state of the alternatives sector and take a view on the strengths and weaknesses of this booming market.
Amy Bensted, Head of Hedge Fund Products, Preqin, tracks two types of liquid alternatives - Alternative UCITS Funds and 40 Act Alternative Mutual Funds. She said that while growth has been significant since 2008, in the last 3 years, growth has been nothing short of spectacular, both in terms of the number of products and the amount of capital invested.
Amy told the session that the reasons for this growth were varied. “If you look at the alternative assets we track on our products, we track private equity, venture capital, hedge funds, real estate and infrastructure funds and these products have great advantages to investors. They can diversify portfolios, they can add a source of non-correlated assets, they can be an inflation hedge and they can also help increase the overall return across portfolios.”
Across the wider alternative sector there has been big growth over the last ten years as wealthy individuals and institutional clients, particularly in Europe, put more and more money into these types of funds. Amy Bensted said that from 2008 onwards, smaller or retail-type clients in Europe and the US began looking at alternative products too. Traditional alternative products like hedge funds often had very high investment minimums. These UCITS products made it more possible for smaller investors to hold alternative assets.
Amy Bensted says the impact has been dramatic. “The effect of both retail capital and institutional capital means there’s been a proliferation of new funds coming into the market. We now track about 1500 liquid alternative products. It’s seen stronger growth in terms on inflows over the last couple of years than other hedge fund strategies so we now estimate that in the liquid alternative space and UCITS and alternative mutual funds there’s about US$500 billion today.”
Joanne Murphy, Managing Director, Asia Pacific, CAIA noted the significance of that in the wider sector. “There’s around three trillion in assets in the hedge fund space globally – to have got to half a trillion in this liquid alternative sector is really impressive.”
Michael Levin, Head of Asset Management, Asia Pacific, Credit Suisse Private Banking, said the way hedge fund-type investments are viewed has changed a lot in the last few decades. “In the 80s and 90s hedge funds were viewed as high risk, high return and designed primarily for high net worth and ultra-high net worth individuals. It wasn’t really until the 2000-2002 period when you saw the tech bubble bursting, equities declining and there was a view from institutional investors that perhaps the traditional allocation model was broken. They viewed hedge funds as an equity replacement and a building block to diversify their portfolio and in fact reduce risk.”
Michael said that now people want consistent returns, low volatility, capital preservation and diversification.
Greg Donohugh, CEO, Double Haven Capital, talked about the challenges of regulation when it came to UCITS and the retail space outside Europe. “The problem is most of the UCITS guidelines, when you bring them and try to apply them to Hong Kong, Singapore, Japan or Australia they will not accept the European guidelines for UCITS which means you have to apply the local unit trust guidelines on top of the UCITS to sell to retail. What that means is if you’re going to go for retail the UCITS product will be more hybrid than what it would be for a currency fund or a macro fund or an equity long/short.”
The panel members concluded with an assessment of the liquid alternative space.
Amy Bensted suggested that people were keen to invest in UCITS funds as they were seen as having the stamp of regulatory approval. On the downside, people may be investing in these products without really understanding the strategy they’re buying into.
Greg Donohugh said that the UCITS framework will help create some stability in the event of a financial crisis, something which is undoubtedly of value to an investor.
Mike Levin ended the session by saying UCITS were not a panacea. “UCITS have to be at least bi-weekly in terms of liquidity but many are being offered in a weekly or a daily format. Actually only a select few strategies are suitable for that kind liquidity. One of the key elements here is this false liquidity or perception of false liquidity and the risk of investors ultimately being dissatisfied with what they receive.”
“On the positive side this is the democratisation of alternatives, offering investors access to a set of investment strategies and a return stream to help diversify their portfolios that simply wasn’t available before. “