BNY Mellon has partnered with FT Remark to produce a white paper titled Split Decisions, based on the survey responses of 400 senior executives at institutional investment firms (conducted by BNY Mellon) and 50 hedge fund executives (conducted by FT Remark). The key takeaway: Institutional investors are allocating more of their capital to alternative strategies, but not as a means of diversifying or mitigating risk, but in pursuit of strong returns in the low-interest-rate environment.
The senior executives surveyed by BNY Mellon included decision-makers at pension funds, investment managers, and insurance funds. BNY’s objective in surveying these leaders was to better understand their approaches for allocating capital to alternative investments.
Investors Seeking Higher Returns
Returns, not diversification benefits, are the driving force behind increased institutional allocations to alts. Nearly two-thirds of respondents said their alternative investments returned 12% or more last year, and more than a quarter reported returns of at least 15%. As a result, 29% of the surveyed investors said they planned to increase their alts allocations this year, while only 6% said they planned to pare back.
Private equity was the most popular class of alternative investments among the institutional investors surveyed, favored by 37% of respondents. Infrastructure and real estate were preferred by 25% and 24%, respectively, while hedge funds brought up the rear as the choice of just 14% of respondents. Among hedge fund strategies, distressed was most popular, with 68% of surveyed investors currently employing distressed strategies and 58% of them ranking distressed as one of the three most attractive strategies for the coming twelve months.
“The continued growth in alternative allocations will be supported by a steady stream of new products and strategies as fund managers cater to increasing amounts of capital headed toward alternative assets,” said Jamie Lewin, managing director and head of manager research at BNY Mellon Investment Management, in a recent statement that accompanied the report. “Innovation and adaptability will be two key differentiators that determine which firms succeed in capturing what’s become an integral part of institutional portfolios.”
Fees in Spotlight
With institutional investors’ focus on performance more than diversification, fees have come under pressure. Seventy-eight percent of the hedge fund executives surveyed by FT Remark said they’re considering reducing their management fees over the next year. The “2 & 20” model could be headed for the dustbin of history.
“Alternatives continue to gain share in portfolios, but institutional investors are becoming more selective about where and how they deploy their capital,” said Frank La Salla, CEO of Alternative Investment Services and Structured Products at BNY Mellon. “As a result, they are demanding greater transparency from their alternative fund managers. This survey reinforces the notion that investors and fund managers alike will need growing levels of support, insight and data to make informed decisions.”
For more information, download a pdf copy of the white paper.
Past performance does not necessarily predict future results.
Jason Seagraves contributed to this article.