This year alternative investments accounted for $5.7 trillion in assets under management, as real estate managers take the largest share and pension funds gobble up most of the investment products.
“smart beta” in focus as a legitimate alternative
While there remains an appetite for alpha-centric hedge fund exposure, the report from the consulting firm of Towers Watson & Co (NYSE:TW) and the Financial Times notes “smart beta” was in focus as a legitimate alternative.
“Investors continue to view the hedge fund portfolio as a decorrelating and diversifying allocation and we can expect strategies that offer very low correlation characteristics to have prominence, including smart beta,” the report said.
As previously reported in ValueWalk, the term “smart beta” was disputed by many at the Morningstar investment conference, “I don’t know what ‘smart beta’ is,” Richard Ferri of Portfolio Solutions said at the Morningstar conference. “It’s a marketing phrase. I would be surprised if 10% of the people running around saying ‘smart beta’ even understand what beta is.” Beta investments, normally associated with market index investments which are typically tied to large market forces such as the S&P 500, are opposed to stock picking or investing using a unique stock selection methodology. “Smart beta is the flavor of the day,” said Chris Brightman, of Research Affiliates. He addressed various methods of “smart” portfolio rebalancing, such as systematically selling stocks that have over performed in the short term and buying stocks that have underperformed. “This doesn’t work in momentum markets.” “Smart beta is defined by me as anything that isn’t beta,” Ferri said, as he outlined three disadvantages of investing in “smart beta.”
While the Tower report anticipated the focus to remain on hedge fund fees, liquidity and transparency, it noted that as funds approach capacity there will be less willingness to negotiate lower fee sharing agreements. This is particularly the case as institutional money increasingly is focused on the largest investment managers.
In regards to geographic location of investment, that was dependent on the investment vehicle. Hedge funds and private equity were mostly focused in North America while real estate, infrastructure and illiquid credit investment was mostly located in Europe.
Alternative investments assets share
In regards to location of the top asset managers, 19 of the top 25 asset managers were located in the US. The largest asset manager, Macquarie Group, with $96 billion in assets under management, is located in Australia. UBS Global Asset Management, fourth on the list, is located in Switzerland while AXA Real Estate is located France.
The report noted that of the Top 100 alternative investment managers, real estate managers have the largest share of assets, grabbing 31 percent market share accounting for over $1 trillion in investments. This is followed by followed by private equity fund managers, who account for 23 percent and $753 billion in assets, which is close to hedge funds, who account for 22 percent and $724 billion of global investment. The allocation list laggards include private equity funds of funds with a 10 percent market share, funds of hedge funds, a market segment under pressure lately, with 5 percent, followed by infrastructure investments with 4 percent market share and commodity based hedge funds garnering 2 percent of assets.
Insurance companies dominate investments in real estate while pension funds have more of an appetite for hedge funds, the study found.
In terms of those consuming alternative investments, pension funds once again top the list, representing 33 percent of the top 100 allocations. This is followed by wealth managers, at 18 percent, insurance companies at 9 percent, sovereign wealth funds at 6 percent, banks and fund of funds and endowments & foundations at just 3 percent of the alternative asset investments.
The top asset managers ranked by wealth manager assets includes Blackrock, with $49 billion in wealth manager assets, followed by UBS Global Asset Management, with $42 billion. Trailing behind is Union Investment in Germany, Credit Suisse Hedging-Griffo out of the US office and Deutsche Asset & Wealth Management out of Germany.