Global demand for retail focused, liquid alternative investment products will reach USD939bn by 2017, more than three times the current level, according to a survey from Citi Prime Finance.
The growth forecast comes amid new flexibility for mutual fund and exchange-traded fund (ETF) providers, unprecedented levels of transparency among hedge funds, and new demands from wealth managers and broker-dealers who want to add alternatives to more mainstream portfolios.
The outlook and analysis is contained in the fourth edition of Citi Prime Finance’s annual survey of hedge fund industry trends, this year titled The Rise of Liquid Alternatives & the Changing Dynamics of Alternative Product Manufacturing & Distribution. The survey is based on 82 in-depth interviews conducted in the US, Europe and Asia with hedge fund managers, asset managers, private equity companies, consultants, funds of hedge funds, pension funds, sovereign wealth funds, endowments and foundations, and intermediaries representing USD336bn in hedge fund assets and USD5.6trn in overall assets.
According to the survey, in the US alone, where retail participation in alternative investment focused mutual funds and ETFs currently stands at USD259bn, new demand will push assets in these vehicles to USD770bn by 2017. Add to that expected new demand for liquid UCITS-structured products in Europe and elsewhere and the total forecasted growth in retail assets moving into hedge funds and other private funds jumps to USD939bn globally. In addition, demand from smaller institutional investors for lower-fee, publicly offered products will push overall global demand for these so-called liquid alternatives to USD1.3trn, a level equal to the total assets invested in all hedge funds in 2008.
“The bridge has been crossed,” says Sandy Kaul, US head of business advisory services at Citi Prime Finance. “The convergence trend that has been blurring the lines between traditional asset managers, hedge funds and private equity firms is complete. Investors can now source an entire range of products from each type of investment firm and for the more liquid of these strategies they can also source the management of the funds in a publicly or privately offered fund structure.”
Survey respondents pointed to three major trends powering the shift to more liquid hedge fund vehicles:
• Regulations enacted under the 1940 Investment Companies Act are making mutual fund and ETF structures more attractive for alternative strategies.
• Dodd-Frank regulations of private funds are forcing unprecedented levels of transparency on hedge funds and requiring participants to create compliance and reporting procedures that more closely mirror the demands placed on publicly offered funds.
• Shifting dynamics in the wealth advisory market are creating a growing need for alternative strategies. First, more wealth advisors in the US are getting paid a combination of fees and commissions, so ensuring the stability of their asset base is critical. Second, more assets are flowing to independent Registered Investment Advisers (RIAs), who often have an “open architecture” approach to investment vehicles and are active in supporting new fund launches. RIAs also have more discretion over client portfolios and can purchase alternative retail products on their behalf.
“Liquid alternatives are reshaping the hedge fund and the overall investment landscapes,” says Alan Pace, global head of sales and client experience for Citi Prime Finance. “While the emergence of publicly available liquid alternatives has already had an impact on the hedge fund industry, we are only in the early stages of growth.”
Alternative assets include investments beyond stocks and bonds which tend to be less liquid or tradable. Three of the most recognisable strategies within the publicly offered liquid alternative sector are long/short equity, market neutral and bear market funds. Others are non-traditional bond funds, managed futures and currency funds, according to the survey. The survey found these new products being managed in parallel with privately offered funds, allowing the same manager to isolate a subset of their more liquid trading ideas and package them in a publicly offered fund wrapper.