Asset Management Intelligence - August 2015 - Alternative Investment Industry Outlook for Q3 and Remainder of 2015

Introduction

With hedge funds overall outperforming (as calculated by the Hedge Fund Research Index) the first half of 2015 despite navigating extremely choppy markets in June and July, especially those with exposure to Greece, China and Puerto Rico, a range of investors, both institutional and individual, are expected to capitalize on their positive returns and deploy more capital to this alternative investment the second half of the year. Pensions, endowments and RIAs are amongst those slated to be most active as they continue to transition from long-only mandates to long/short equity ones; and additionally, multi-strategy offerings, commodity trading advisors (“CTAs”) and equity market neutral portfolios are a few options that also appear to be poised for inflows from those allocators. Further, there continues to be interest in emerging hedge fund managers, especially women and minority-owned ones (typically known as women and minority business enterprises or WMBEs), from both institutions and seeders actively looking to fund them.  Meanwhile, investors are also anticipated to demonstrate continued interest on the private equity side, especially after managers in this space have outperformed in all market conditions.

Investor Outlook

Pensions, endowments and RIAs are eyeing multi-strategy portfolios, CTAs or market neutral offerings, all for different reasons, according to Richard Taglianetti, managing director, Corinthian Partners, who specified that multi-strategy managers are appealing for diversification; CTAs are attractive because they show low-to-negative correlations to traditional asset classes and commodities over the last ten years; and equity market neutral is in favor as everyone awaits a less accommodating Fed. All three strategies seek uncorrelated, absolute returns. “Ten years ago if asked to name the top ten investors, nine of ten would have been long-only,” he said. “Today, that's reversed.  Alternatives continue to grow.”

A survey released by Altegris Advisors at the end of June confirmed that institutional and high net worth investors are bullish on alternatives, with 66% of respondents confirming they intend to boost their allocation the second half of the year.

WMBE

Institutional investors and seeders continue to express interest in WMBE funds, whether through a fund of hedge funds (“FoHF”) vehicle made of up them or via a direct hedge fund investment.

Erik Serrano Berntsen, CEO, Stable Asset Management, a fund seeding firm with offices in London, New York and San Francisco, said he is currently looking to seed women-owned managers.

“There is significant research and certain anecdotal evidence that female managers perform better than male managers in certain strategies and during certain market conditions,” he said. “We believe that by definition a female manager in a portfolio would bring diversification if their approach is differentiated.”

Pensions & Investments a few months ago reported that a number of pensions allocated to a number of women or minority-owned FoHFs, including New York City Retirement Systems, New York State Common Retirement Fund and Connecticut Retirement Plans & Trust Funds. It also revealed that a number of FoHFs specifically look to allocate to WMBEs including Appomattox Advisory and the Rock Creek Group.

Private Equity

On the leveraged buyout side, following the stellar performance of 2014, investors continue to be eager about the prospect for managers in this more illiquid alternative investment type.

Harold Zlot, investment committee member for the San Francisco-based Jewish Community Federation and Endowment Fund, said the private equity and venture capital investments were amongst the best-performers in their portfolio. Therefore, he continues to be bullish on these longer-term alternative investments.

“I think the reason private equity and venture capital added so much value to the total portfolio was that they had long dated investments in these spaces which given the hot IPO market the past few years they have been able to pay off,” he said.  “Going forward, who knows, but I would guess there are other positions that might have a big payoff—Airbnb, Uber, etc.”

Conclusion

If investors continue to be positive on alternative investments going forward—both hedge funds and private equity—and, more specifically, initiate WMBE mandates, managers overall are poised for robust inflows. That’s if these funds continue to navigate the very choppy markets across three continents.

Asset Management Intelligence - August 2015

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