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Market downturn could attract fresh source of capital

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Alternative UCITS funds experienced a 16 per cent growth in AUM in 2017, with total assets exceeding USD522 billion according to LuxHedge, an alternative UCITS index provider. Over that period, a record 248 new funds launched and the sense was that investor sentiment remained upbeat. 

However, if one assesses 2018, there are indications that this level of growth will be difficult to replicate with one data source, Kepler Partners, suggesting that industry AUM has only increased by 1 per cent from Q317 to Q318 (quite a contrast to the 20+ per cent annualised growth rate witnessed over the last nine years.

“If you look at Kepler’s Absolute Hedge (AH) Global Index, returns are down 1.3 per cent year-to-date compared to 3.7 per cent for 2017,” says Andrew Dreaneen, Head of Liquid Alternatives, Schroders. “Broadly speaking, investors are a little reluctant to make new investment decisions. Overall, however, one would think that the concerns over trade wars, or later stage cycle volatility, would bode quite well for alternative UCITS because they play a longer-term role in portfolios where it is less important to time the asset class.”

If one looks back at periods such as 2008 and 2011, when investors were particularly nervous about market volatility, it did not lead to an immediate uptick in inflows. It’s not during a downturn, but the period immediately thereafter, that one tends to see an uptick in demand for liquid alternatives, according to Dreaneen: “I think we are experiencing a bit of that holding pattern right now. Investors are wondering what to do and are sitting on their current portfolio allocations. October has been a volatile month so it is going to be interesting to see how investors position themselves in the run up to year end and in the first quarter of 2019 when we tend to see the most asset allocation activity.” 

The Schroder GAIA platform is one of Europe’s best known and biggest alternative UCITS platforms, with AUM currently stood at approximately USD6.5 billion. 
“There have been 57 fund launches so far this year and about USD4.4 billion has been raised. The number one fund in terms of assets is Schroder GAIA Wellington Pagosa, which has raised more than USD400 million, while another of our funds, Schroder GAIA Contour Tech Equity has raised around USD200 million. Both of these funds are in the top ten, in terms of assets raised,” confirms Dreaneen.

Schroder GAIA Wellington Pagosa is a multi-strategy fund that invests in long/short equity strategies both directional and market neutral, long/short credit, EM macro, and discretionary macro RV. It was launched in direct response to investor demand, some of whom have become risk averse, others who are keen to build diversified portfolios of alternative UCITS funds and wish to do so as efficiently as possible by allocating to multi-strategy, multi-manager products.

Schroder GAIA Wellington Pagosa, which launched in February 2018, meets that demand as it is diversified across 10 distinct and complementary hedge fund strategies managed by 26 of Wellington’s most seasoned and highly skilled portfolio managers. 

“It plays to those looking for a single allocation to get a broad, diversified alternative UCITS portfolio, targeting 6 to 8 per cent annualised returns with 5 to 7 per cent volatility. That kind of return profile is definitely popular with some investors, and in some countries we are even seeing demand for funds seeking a lower risk return profile 2 to 4 per cent annualised returns with commensurate volatility,” notes Dreaneen.

He is in no doubt that even if overall growth softens this year, there is plenty of future potential for at the industry level, especially if there is a more meaningful downturn in the markets in the near future.

“If there is a material downturn in the market, I do expect industry growth to pick up pace again. We have no shortage of clients looking at products and doing due diligence. It is on par with what we’ve seen in previous years it’s just the allocations have materially slowed at an overall asset management industry level not just liquid alternatives.

“By no means does the last 12 months signal the end of alternative UCITS. I still feel the industry has huge opportunities to grow from here, based on the conversations we are having,” asserts Dreaneen.

This is where the skill-set of the platform operator comes into sharp focus. There are thousands of funds in the industry but the trick is to identify the best-in-class managers who are willing and able to deliver their offshore strategy in a UCITS wrapper, to meet investor demand. This is what Schroder GAIA has cultivated over the years, building a carefully selected universe of high quality funds that not only deliver returns but attract substantial investor assets. 

Even if the industry suffers the jitters it is not to suggest that demand for highly differentiated unique sources of alpha is going to disappear. As the industry starts to mature there is a greater demand for innovative strategies as investors become more selective on where they put their incremental dollars, especially with markets being so choppy. 

“We launched the platform in November 2009 and every year we see new countries and new distribution channels open up,” observes Dreaneen. 

“As such, we do see demand for alternative UCITS across the board and it cuts across many channels. In some cases, investors can only allocate to UCITS, so it’s a straightforward conversation. In other cases, they can also buy offshore funds and want a detailed comparison between the UCITS fund versus the offshore fund to make an informed decision.

“Over the last 12 months, we’ve seen one or two institutional investors who previously used Cayman funds deciding to make an allocation to a Schroder GAIA fund. On the margin, we have also seen more interest this year among consultants. That gives us confidence in the future growth of alternative UCITS. In most cases, people are looking to do more in this space, even if that hasn’t yet been backed up by cash flows.”

Institutional and mass retail channels are huge areas of growth for alternative UCITS and Schroders is well positioned with a franchise of over 30 alternative UCITS funds and more than 850 distribution, product and solutions professionals globally. 

Dreaneen estimates that by channel, 65 per cent are intermediaries, which cut across asset managers, private banks, family offices and fund-of-funds and 35 per cent are institutions; insurance companies and pension funds.

He states that Schroders’ network of 850-plus team of client facing professionals is a “critical component” to the success of the GAIA platform. 

“We listen to what clients are looking for,” says Dreaneen, “and react to that the best way we can. It is a critical component to how we onboard strategies and new managers. Our pipeline is always based upon where we see the most demand.” 

Being able to understand what clients’ sensitivities are to fees, to liquidity terms, to volatility, etc, helps the Schroder GAIA team to create and design relevant products. It is a very iterative process. 

“Managers value the insights we bring to the table based on what the demand picture looks like. The draw card for managers is to tap into our vast distribution network and ideally hit the ground running with their fund, which has been vetted by clients from a design perspective and in some cases seeded as well,” concludes Dreaneen. 

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