Alternative assets continue to grow, finds Towers Watson survey
Alternative Assets grew to $5.7 trillion from $5.1 trillion over the course of 2014, with the top 100 managers accounting for $3.3 trillion of that, according to a Towers Watson survey produced in conjunction with the Financial Times.
Of the top 100 alternative investment managers, real estate comprises 31% or more than $1 trillion of the sum total; followed by private equity which accounts for 23% or $753 billion. Hedge funds control 22%, or $724 billion. Private equity funds of funds manage 10%, or $322 billion while funds of hedge funds comprise 5%, or $173 billion.
In terms of investors, pension funds represent a third (33%) of the top 100 alternative managers’ assets. This comes as a growing number of pension funds, estimated to be around 25%, are struggling to meet their liabilities, and this figure is projected to grow. This is followed by wealth managers (18%), insurance companies (9%), sovereign wealth funds (6%), banks (3%), funds of funds (3%) and endowments (3%).
“There remains an appetite for alpha-centric hedge fund exposure in client portfolios for its diversifying nature, although there is increasing awareness of the impact of fees on the net alpha expectation,” read the Towers Watson report. It added there was continued demand for smart beta, which tend to be lower cost and more liquid than traditional hedge fund strategies. It said hedge fund managers had generally been receptive to institutional investor demands for better access to smart beta strategies.
A study by Citi Prime Finance in June 2014 highlighted a growing band of hedge fund managers were being given capital to run as long-only funds. Citi estimated long-only vehicles at hedge funds managed approximately $183 billion in AuM. Meanwhile, a study in December 2013 by Deutsche Bank Markets Prime Finance found nearly half of all hedge funds were running a non-traditional hedge fund product bringing them into direct competition with asset managers. Sixty-seven per-cent of managers told Deutsche Bank that their rationale to launch long-only products was investor driven.
The Towers Watson study highlighted investor attention towards fees, liquidity and transparency at their hedge funds would continue. It added interest in managed accounts and UCITS would also remain. A number of prime brokers report muted interest in managed accounts with growth staying fairly static over the last few years. Meanwhile, UCITS continues to grow slowly although there is speculation that firms compliant with the soon-to-be-implemented Alternative Investment Fund Managers Directive (AIFMD) could steal business away from UCITS.
Towers Watson’s survey also highlighted the buoyant market conditions that had enabled private equity vehicles to generate decent returns for end clients had facilitated an increase in fundraising activity. “This positive cash-flow from an investor perspective has increased the propensity to commit new capital to favoured managers. That said, the market remains somewhat bifurcated with those managers boasting exceptional short and long-term track records raising capital successfully while others take longer to secure capital,” read the report.
The report predicted pressure on private equity fees would continue. This comes as regulators, most notably the Securities and Exchange Commission (SEC) delve deeper into the fees and expenses being charged by private equity houses. A speech in May 2014 by Andrew Bowden, director of the Office of Compliance Inspections and Examinations at the SEC, identified potential conflicts of interest between private equity firms and their investors over fees, expenses and portfolio company valuations. There are concerns at the SEC that some private equity shops are charging investors unfairly for expenses. Investors have reportedly been questioning private equity shops about fees and expenses more thoroughly following Bowden’s speech. The SEC has recently been questioning private equity managers about their deals and fees dating all the way back to 2007.
The decline of funds of hedge funds continued amid widespread consolidation in the asset class, added the report. “Remaining funds of hedge funds (are) continuing to increase their delivery of customised implementations for investors and a paring back of co-mingled usage,” read the Towers Watson report. Funds of hedge funds have delivered steady albeit unspectacular returns of 2% year-to-date 2014, according to data from the Chicago-based Hedge Fund Research. However, the asset class enjoyed something of a turnaround in 2013 with the average manager posting gains of 7.47%, just shy of the 8.31% delivered by the average single hedge fund manager. Funds of hedge funds are struggling to attract meaningful capital though, particularly as investment consultants increasingly win business from them courtesy of their lower fees and growing commitment towards operational due diligence.