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Asset Management Intelligence - February 2015 - Alternative Investment Industry Outlook for 2015

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Elana MarguliesDespite hedge funds underperforming the S&P 500 Index last year and the California Public Employees’ Retirement System, the biggest U.S. pension, deciding to divest from the asset class, the alternative investment industry is poised for a stellar 2015. Investors are expected to increase their allocations to both hedge funds and private equity, managers are anticipated to outperform, the industry will see more new fund launches, and finally, there will be continued growth in the liquid alternatives space.

INVESTOR OUTLOOK

Both institutional investors, led by public pension funds, and family offices/high-net-worth individuals, are expected to boost their allocations to alternative investments.

Don Steinbrugge, managing member of Agecroft Partners, a Richmond, Virginia-based third-party marketing firm, specified that public pensions are expected to be the most active group of institutional investors that will increase their hedge fund allocations, redeeming money from both their long-only fixed-income and long-only equity buckets and redeploying it to hedge funds, arguing the returns are likely to be higher.

“Pensions will be coming out of the fixed-income component part of their portfolio because this long-only fixed income component is expected to generate a 2.5-3% return while hedge funds are expected to generate a 4-7% return,” he said. “Also, some money may come out of equities into hedge funds as a means for a diversification hedging strategy to reduce downside volatility.”

Some allocators will prefer managers with a longer track record and greater amount of AUM while others will favor smaller and/or emerging managers.

MSF Capital Advisors, a New York-based global multi-family office, which invests opportunistically, is one investor that will continue to eye smaller managers on the premise they perform better than the bigger funds.

“Like most studies have found, the smaller managers have gotten better alpha and we certainly believe in that,” said Michael Felman, president.

Last year, MSF Capital Advisors seeded two private equity funds.

PERFORMANCE

Both hedge funds and private equity managers are expected to generate solid returns this year. Hedge funds will benefit from the increase in volatility in the marketplace while leveraged buyout managers will profit from more attractive valuations.

Matt DenBleyker, director of research at Larry Thompson & Associates, a Dallas-based independent investment management consulting firm, said that the multi-strategy hedge funds and sub-strategies that underperformed last year are poised to benefit this year due to the increase in volatility.

“The unwinding of the Fed stimulus will prompt volatility to pick up and help hedge fund performance,” he said.

He specified that equity long/short, credit long/short and event-driven strategies are amongst some groups slated to benefit from the spike in volatility.

Meanwhile, on the private equity side, he added middle market offerings will be one of the best performers as a result of more attractive valuations.

LAUNCH ACTIVITY

As a result of the positive performance, the alternative investment industry is expected to see more launches.

Boris Onefater, CEO of Constellation Investment Consulting Corporation in New York, said that the industry will witness more launches in the first quarter since a number of them were postponed from the fourth quarter last year due to overall underperformance.

“We will see a lot of peer-to-peer lending launches, long/short equity launches, long-biased global, credit and real estate-supported products,” he said.

According to the most recent data from Hedge Fund Research, an industry research firm, the pace of launches slowed throughout last year. There were only 240 new fund launches in the third quarter last year compared to 285 during the second quarter.

LIQUID ALTERNATIVES

Liquid alternatives are on target for continued growth this year, both in the total amount of AUM and in the number of new product launches.

Rafay H. Farooqui, co-founder and president of CAIS, a New York-based financial product platform for registered investment advisors and broker-dealers, said the space will see new multi-manager and single-manager fund launches, along with more wealth advisors using liquid alternatives as a key component of their asset allocation process.

“Liquid alternatives appear to be at the beginning of a 10-15 year growth period and one that could result in a similar success to that of the ETF market,” he said. “2015 should be no different than 2012, 2013 and 2014 in that there should be continued double-digit growth in the number of funds and the AUM they attract.”

CONCLUSION

If these predictions hold true, between increased investor interest, outperformance, more new launches and the robust growth in liquid alternatives, 2015 should be a great year for the alternative investment industry. As a result, AUM will reach new levels.


Asset Management Intelligence - February 2015

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