Global financial crises and continued market volatility have transformed attitudes toward investing. As managers respond to the evolving needs of investors and their advisors, previously segregated products and segments are converging, according to a new paper from SEI.
Regulated Alternative Funds: The New Conventional, which evaluates the opportunities and challenges managers face when launching and distributing alternative investment strategies in a registered mutual fund or UCITS format, says the convergence is seen in growing capital flows into regulated alternative investment products, most often in the form of UCITS funds and US-registered mutual funds.
During the first half of 2011, more than USD58 billion was poured into regulated funds using alternative strategies. With no slowdown of demand in sight, assets in alternative mutual funds and UCITS could hit the USD1 trillion mark by 2014.
Growth is being driven by several factors, Firstly, investors are looking for ways to bolster portfolio performance, protect capital, and lower volatility. Secondly, traditional managers want to tap higher-fee areas, and thirdly, alternative managers would like to expand and diversify their client base.
Alternative strategies still account for a small portion of the UCITS and US mutual fund markets, but they continue to capture increased market share. They are also the most popular category in product development pipelines.
Alternative strategies inside UCITS attracted USD27 billion of net new flows in the first half of 2011, 26% higher than in the second half of last year. This was achieved despite overall flows into long-term UCITS declining by over 50% during the same period. There are now over 1,500 UCITS funds in Europe using alternative strategies and managing a combined USD254 billion of assets.
Alternative strategies through US mutual funds and ETFs drew USD39 billion in net inflows in the first eight months of 2011, on pace to come near 2010’s USD65 billion. By the end of September 2011, the US had roughly 760 alternative mutual funds and ETFs, 150 of which had been launched in the first nine months of 2011 alone.
Regulators remain concerned with the growth of derivatives use among regulated funds and have been reviewing derivatives policy for more than a year. The SEC has gone so far as to freeze most approvals of new funds and ETFs that rely heavily on derivatives, as it continues to conduct its review.
The future of alternative investments through regulated funds hinges to a large degree on robust risk management. Fund managers assume primary responsibility for implementing the necessary controls, but independent service providers also play important roles. Investors can also take some comfort in detailed regulatory requirements around risk measurement and management, liquidity, counterparty diversification, and limits on leverage.
Despite becoming increasingly competitive, the market for regulated alternative funds remains much more fragmented than traditional parts of the business, and no dominant players have yet emerged. As managers jockey for position and vie for the attention of investors, intermediaries, and gatekeepers, product innovation and distribution expertise will be key factors in determining the winners.
Partnerships that combine the investment expertise of existing alternative managers with the distribution prowess of traditional managers will become more common as managers of all stripes look for ways to gain a foothold in one of the most dynamic and growing parts of the asset management business.