World’s wealthy flock to alternative assets

New research show that alternative assets are set to rise – and HNWs are already on board, writes Arun Kakar

One in four HNWs is allocating at least 20 per cent of their wealth into alternative assets such as hedge funds, with the class expected to reach an AUM of $14 trillion by 2023, new reports claim.

The survey, commissioned by boutique investment firm Connection Capital, quizzed 120 of its private investor clients and found that one in five have at least a fifth of their portfolio allocated to alternative assets including private equity, commercial property and hedge funds.

Investors are looking to access different ‘sophisticated alternative strategies’ to reduce  ‘correlation within portfolios’ and ‘improve overall risk-adjusted returns’.

Claire Madden, managing partner at Connection Capital, which has £250 million AUM, said: ‘Given the current challenging investment environment for traditional asset classes, a move towards higher allocations to alternatives is understandable for sophisticated private investors with the right risk profile.’

The sentiment was echoed by a separate report from alternative asset data firm Preqin that forecasts a 58 per cent growth in private equity funds to $4.9 trillion worldwide, overtaking hedge funds as the largest alternative asset class over the next five years. Preqin has tipped hedge funds to grow by 31 per cent over the same period to $4.7 trillion, and predicted that family office wealth would be a significant player.

The Preqin report editor Chris Beales said that increase came with ‘good reason’.  He added: ‘With capital more often than not in the hands of a small number of investors, fund managers are looking to stand out from one another, enticing investors with more customisable fund structures.’

A consistent record and ‘enduring ability to deliver risk-adjusted returns’ as well as the investor need for alpha were posited by the report as drivers for growth in the asset class: the difficulty of attaining alpha in public markets against private capital is causing more investors to increase their allocations in alternatives, it claimed. The increased presence of private capital with funding businesses throughout their lifecycle, alongside a decline in the number of listed stocks were also noted with growing opportunities in private debt, as other factors driving growth in the asset class.

The report – which also pooled surveys from 300 fund managers and more than 120 institutional investors – found that 65 per cent of fund managers expected family offices to play ‘a more important role as a source of capital’ in five years’ time. Less than a third (32 per cent) expected to source lower proportion of their capital from North American based funds, with 60 per cent expecting to source more capital from Asia-Pacific based investors. Some 45 per cent of fund managers expected ‘proportionally less capital’ to be invested I pooled funds by 2023, a view shared by just 15 per cent of investors.

‘While pooled funds have in the past accounted for the majority of capital in alternatives, a significant proportion of fund managers expect this balance to shift,’ added Beales. ‘They predict a rise in co-investment activity, as well as more separate and managed accounts – structures that offer investors more control and often lower fees.’

Despite the adaptability of the alternative assets industry in the past, the report warned that the next five years would bring ‘more rapid and significant changes than ever before’ with an increasing role for co-investments and other investment structures, and a ‘triple whammy’ of transparency and monitoring on the horizon.

Arun Kakar writes for Spear’s 

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