A recently published report from the Deloitte Center for Financial Services titled “2014 Alternative Investment Outlook: Championing Growth, Finding Agility in Uneven Conditions” offers a positive outlook on the alternative investments market. “A turning point is already unfolding in 2014. Institutional investors are piling into alternatives despite their recent uneven performance. These investors are attracted to the industry’s long-term track record for producing non-correlated, superior risk-adjusted returns. At the same time, they are looking at alternatives through a new lens.”

Alternative investment funds raise record amounts

The report additionally highlights that alternative investment managers continued to raise record sums over the past year despite a challenging macroeconomic environment. Hedge fund assets under management (AUM) grew to a record $2.6 trillion in 2013. Furthermore, private equity fundraising was also quite strong, with PE firms raising the largest amount since 2008 (more than $600 billion).

Alternative investment Private equity fund raising

Bigger is better as far as private equity investors are concerned

The Deloitte report points out, however, that bigger is clearly better as far as PE investors are concerned. “The biggest private equity funds continued to garner the most attention, with the remaining funds seeing their average new fund sizes reduced by as much as half that of previous efforts.”

Institutions increasingly turning to alternative investments

The fact that a growing number of formerly conservative institutions such as pension funds are now willing to take measured risks has led to these institutions to work with PE firms and hedge funds as well as to increase their alt inv portfolio allocations overall.

Private equity investor breakdown

One of the primary reasons that the bigger hedge funds and PE firms just keep getting bigger, while smaller firms are seeing little growth, is that institutional investors typically want to work with the biggest and best in the alt inv sector. “As institutional investors account for a growing share of the pie, the big alternative funds will likely continue to get bigger. Given that these investors’ fiduciary responsibility makes them particularly sensitive to headline risk, they are naturally drawn to larger, well-established funds with impressive operational and compliance infrastructures.”

Deloitte has positive outlook for 2014

Notwithstanding the problems facing smaller firms, Deloitte is sanguine about about both hedge fund and PE firm performance in 2014. “Private equity funds finally appear poised to put more of their dry powder to work, even if they have to set their sights on smaller deals. Hedge funds are embracing change in different ways by testing new strategies, geographies, and distribution channels. The overarching story is no longer one of capitulation — but of growth. And that’s a story we believe leading and emerging fund managers will enjoy telling this time next year.”