Retail alternatives are gaining a groundswell of interest, becoming a rapidly emerging sector of the asset management industry.
A recent paper titled “The Retail Alternatives Phenomenon” published by SEI points out that the sea change presents a whole new opportunity for private fund managers.
Assets doubled since 2008
Retail alternatives refer to alternative strategies packaged in vehicles that provide daily (in UCITS, at least twice monthly) pricing and liquidity. Ideally, alternatives are structured as mutual funds in the U.S. and UCITS in Europe, but they may also be packaged as ETFs or managed accounts.
According to the SEI paper, assets in the U.S. alternative mutual funds and Exchange Traded Funds have more than doubled since 2008. Currently, there are 883 portfolios, with over $550 billion in assets. Alternatives in UCITS in the European market witnessed similar growth.
According to the SEI paper, forecasts predict that retail alternatives’ growth to date is just the beginning. By 2015, retail alternatives are expected to account for $25 billion in revenues. This translates to a quarter of all retail revenue, which is a majority of retail revenue growth according to a McKinsey & Company study.
The following graph reveals the forecasts in retail alternatives:
Retail alternatives appeal to private fund managers
In its report, SEI points out though institutional investors have spearheaded the growth of alternatives and continue to enhance their allocations, the industry is maturing. This suggests that allocations may not grow as rapidly in the future as they have in the past.
In the current climate of slower economic growth, low yields, and elevated asset-class correlations, even private fund managers find themselves competing with traditional long-only managers. And with the passage of the Dodd-Frank Act in 2010, the regulatory differences between private funds and retail funds have started waning in the U.S. market.
Apart from potential offered by the retail market, several other advantages are attractive to private fund managers. For instance, retail products facilitate private fund managers to diversify their client bases as well as their product lines.
Some of the statistics highlighted by the paper to emphasize the growing appeal of retail alternatives include: 74% of advisors utilize alternative strategies, while 75% of advisors in the past year have increased their allocation to alternate assets. More importantly, 53% of investors prefer to consider using alternative investments.
DC plans most promising
The SEI paper also highlights the retirement plan market. DC plans, particularly the 401(k) market, appear to be the most promising segment for managers of retail alternatives. This is evidenced by the fact that private equity giants such as The Blackstone Group L.P. (NYSE:BX) and the Carlyle Group LP (NASDAQ:CG) have either already launched or are planning to launch products targeting the 401(k) segment.
The SEI paper cautions that private fund managers moving into the retail market will not be an easy matter, as they have to confront challenges from dealing with cultural and regulatory differences, besides acquiring expertise to develop specialized distribution and infrastructure. They should also be willing to wait for profitability and commit substantial resources towards education.