Mainstream Alternatives?

October 3, 2012

Although alternative investments experienced explosive growth in the mid 2000s (nearly doubling from $2.9 to $5.7 trillion) they suffered for a number of reasons during the subsequent market crisis, leaving many to wonder whether their time had passed.  However, many signs point to their resurgence and indicate that traditional asset managers are going to have to work hard to capitalize on their growth, and that “mainstream alternatives” might not be as oxymoronic as they initially sound! 

A recent study by Natixis Global Asset Management reveals that institutional investors globally see the value of alternatives, specifically that:

  • Investors believe that investing in alternatives will help them beat market returns.
  • Investors are confident that they will beat last year’s returns.
  • Investors report overall satisfaction with the performance of alternatives (with the vast majority of respondents planning to increase or keep their allocation).
  • Investors think that investing in liquid alternatives helps limit portfolio risk.
  • Investors’ allocations to real estate and socially responsible investing are below target, indicating that at least a part of the opportunity for growth is immediate.

“The Mainstreaming of Alternative Investments,” a report recently released by McKinsey & Company, (registration required) echoes the investor perspective of the Natixis survey and also shares some interesting insights on how this shift impacts the practice of asset management businesses—which in turn reveals the impacts on the systems and business processes that support them.  Primarily, the study urges asset managers to look beyond alternatives as an asset class or product offering and consider them more holistically, as a business unto themselves—which admittedly presents a slew of strategic challenges, including: 

  • Managing returns to an absolute-return target or objective (rather than the relative return investment framework);
  • Improving risk management, reporting, and sales capabilities; and
  • Resolving organizational conflicts that may arise from integrating traditional and alternatives work cultures.

The extent to which this so-called “mainstreaming” requires firms to change is further emphasized by the fact that it is challenging even specialist alternative managers, particularly in the area of service—investors aren’t looking “only” for strong returns. 

Given that traditional asset managers need to adapt and specialists are facing some struggles, who ultimately “owns” this space remains to be seen.  Anyone can benefit from this projected growth, provided they are willing and able to change in order to meet market and customer requirements.  To that end, asset management firms must make tactical changes to support strategic ones, namely:  

  • Identifying and developing the skills and expertise needed to be successful, but at the same time realizing that a successful track record is critical to attracting investors and as such gaining traction will take time.
  • Ensuring that internal systems can be integrated with one another in order to provide investors with the accurate reports and transparency they are clamoring for.
  • Realizing the importance of having systems that are flexible and scalable to accommodate alternative investments and growing portfolios (and taking advantage of the side benefit of such, like having more time to focus on the market-facing activities that are a key to success).
  • Leveraging and extending client relationships to provide better service, engender loyalty, and to create sustainable momentum.
  • Utilizing all organizational resources to successfully support, sell, and market a firm’s capabilities in a comprehensive and integrated way.

Whether you are in investor or an asset manager, it looks like alternative investments are here to stay.  Making sure that your investment strategies, personnel, systems, and processes can support alternatives will leave you well-positioned to seize the “massive opportunity.”

 – Nicole Comeau, Product Manager

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