Alternatives' AuM to rise as more firms seek retail investment

02 Aug, 2012

Allocations into alternatives reached $6.5 trillion and is expected to grow further as various asset classes, including hedge funds, branch into retail, according to a report by McKinsey & Co.

McKinsey’s projections point out retail alternatives, predominantly 40 Act Funds, could account for 13% of retail fund assets and 25% of all revenues by 2015.These funds as of 2010 comprised 6% of all retail assets and 13% of total revenues.

The report said alternatives were becoming more mainstream as retail investors, confronted with volatile markets and retirement saving gaps, sought to diversify their portfolios. Many managers are packaging their strategies into regulated mutual fund structures, ETFs, Ucits and 40 Act Funds giving them greater distribution channels.

“Hedge funds have been becoming more mainstream over the last few years. The trend occurred first in Europe through Ucits, and now in the US we are seeing more 40 Act Funds, which have been raising a lot of capital. The situation is bound to improve with the JOBS Act, which will enable hedge funds to market and advertise publicly for the first time  to the general public, although they can only accept investments from  accredited investors with more than $1 million in investable assets,” said Don Steinbrugge, managing member at Agecroft Partners, a Virginia-based third party marketing firm.

These findings come shortly after a Citi Prime Services paper predicted inflows into hedge funds would reach $5 trillion. The paper reckoned $2 trillion of these inflows would be attributable to hedge funds shoehorning products into regulated alternatives such as Ucits and 40 Act Funds, as well as long only vehicles.  Citi said these vehicles would be offered primarily to institutions with liquidity constraints and retail investors.

There are concerns, however, that some managers may attempt to put illiquid or complex products into these regulated entities. Debate is raging in the EU about whether to split Ucits into complex and non-complex amid concerns the brand could be irreparably damaged by a blow-up or liquidity dry up.

The McKinsey paper said institutional investors also intended to boost their exposures to alternatives from 26% of total portfolio assets to 28% by year-end 2013. The strongest hedge fund growth is expected to be in the US while private equity and real estate will fare better in Europe.

Smaller, less experienced institutions continue to leverage the expertise of funds of funds vehicles, the paper confirmed. “Institutions, particularly pension funds, with less than $1 billion, buy into funds of funds as they do not have the infrastructure or personnel to go direct,” said Steinbrugge.

However, larger institutions are increasingly going direct as they bolster their alternatives teams and bring management in house. Many institutions are also utilising consultants to gain alternatives exposure. According to a Goldman Sachs prime brokerage survey, consultants could control 17% of hedge fund industry AuM by year-end 2012, a huge increase from 2007 when these organisations controlled a mere 3%.

“A lot more institutions, particularly pension funds are going direct because they have large liabilities and are making insignificant returns through traditional asset classes – take fixed income for example, they would be lucky to get 2% after fees. I also predict more pension funds will diversify into smaller managers who are genuine alpha generators rather than brand name players,” commented Steinbrugge.

40 Act FundsAgecroft PartnersCiticonsultantsETFsGoldman SachsJOBS ActMcKinseyUCITS