Alternative Investment Management Association Representing the global hedge fund industry
It is no overstatement to say that the move toward investing in alternatives has been one of the farthest-reaching developments in institutional investing over the last quarter century. The past decade has seen two waves of particularly rapid growth. Between 2005 and 2007, global alternative asset classes managed by various types of managers nearly doubled, from $2.9 trillion to $5.7 trillion.
After a pause in 2008, as shocked investors regained their bearings and took stock, the importance of non-correlation and hedging truly hit home. Global alternative assets under management then rose to a record level of $6.5 trillion by the end of 2011, with a growth rate far outpacing that of traditional asset classes during this period.
Now a third wave of growth in alternative investing is underway, only this time it is encompassing the mainstream. Alternatives are migrating from institutional to retail markets, just as the use of asset allocation models did several decades back.
The retail alternatives market
The market for retail alternatives is huge and growing yet still in its infancy, offering exciting long-term opportunities for private fund managers who seek to diversify their revenue streams and find new outlets for their capabilities. The migration of alternatives into the retail space comes at a propitious time for private fund managers. While institutional investors have spearheaded the growth of alternatives and continue to increase their allocations, the industry is maturing, suggesting that allocations may not grow as rapidly in the future as they have in the past. Casey Quirk’s recent study, The Complete Firm, is bullish on the retail market, predicting that individual investors will drive the demand for alternative strategies. The firm predicts that AUM in those strategies will grow at a compound annual rate of 10.2% amongst mass affluent investors and 9.3% in the high-net-worth segment, as opposed to 7.7% for institutions
Based on the recent growth of hedge-style mutual funds, the blend of alternative strategies with the transparency, liquidity and regulatory oversight of regulated retail investment vehicles has growing appeal to financial advisors and their clients. Even in the defined contribution retirement plan market, which has tended to skew conservative, non-traditional investments, such as real estate investment trusts, are gaining traction, paving the way for an array of alternative strategies.
For private fund managers, this is a sea change that could open up a whole new area of opportunity —
indeed, one that could potentially dwarf the institutional market. Yet, to those steeped in the rarefied world of hedge funds and private equity, the retail landscape is like a foreign country — one that is distinctly different in terms of its culture, product development, marketing and distribution, regulatory framework and operational environment, not to mention fee structures.
This trend presents private fund managers with a vast new market at a time when the growth of institutional allocations to alternatives may be slowing. In addition to its size and growing momentum, the retail market offers private fund managers the chance to diversify their revenue streams, earn more consistent fees, and market their capabilities with fewer restrictions.
Realistic view of the opportunity
It is vital that entrepreneurial fund managers take a balanced and realistic view of the opportunity in retail alternatives. Capitalising on its potential is no easy matter. Private fund managers who want to succeed will need to overcome a number of obstacles, devote substantial time and resources to educational efforts and find ways to fill their gaps in fund infrastructure and distribution expertise. They must also be willing to make investments, both in the substantial start-up process and ongoing, as fund operations may need to be subsidised for some indefinite period of time; profitability will not come overnight.
Of course, opportunities remain in the institutional market Institutions continue to incrementally increase their alternative allocations, and undoubtedly some hedge fund and private equity managers will want to remain institutionally-focussed. But for those who are willing to take a long-term strategic view, desire a new investor base with different revenue sources or want to be evangelists for their investment processes, retail alternatives may be too important and promising a trend to ignore.
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