However, 2020 will be another negative year for net new inflows into liquid alternatives in Europe.

The need for diversification and the promise of uncorrelated returns will boost demand in Europe for liquid alternatives over the medium term, says new research presented in the latest issue of The Cerulli Edge – Global Edition. (HedgeWeek)

Liquid alternatives still in the game

Cerulli believes that declining fees, their greater transparency, and the potential for uncorrelated returns could encourage investors to diversify their portfolios into liquid alternatives.

Further, the pandemic could have an adverse and disruptive effect on the financial markets. This could work to the advantage of liquid alternatives fund managers through higher inflows.

Moreover, the liquid alternatives market could benefit from investors’ interest in private assets, particularly real assets. Cerulli projects that this trend will likely remain strong. It expects rising demand for these assets from wealth management firms and private banks.

A forgettable 2020

On the flipside, Cerulli projects that 2020 will be an indifferent year for liquid alternatives like its predecessor.

During 2020, the performance of liquid alternatives was superior versus the traditional investments in the initial months of the pandemic. However, the recovery in the financial markets thereafter took away this advantage.

“Net new flows of liquid alternatives in Europe will likely be negative for a second consecutive year in 2020, although net new outflows are expected to moderate in the latter part of the year,” says Andrius Dovydavicius, a research analyst with the European institutional team at Cerulli Associates.

Liquid alternatives assets under management in Europe as at the end of September 2020 fell 15% from the beginning of the year to € 356 billion.

However significantly, withdrawals declined to only $ 1 billion during the third quarter.

Cerulli’s crystal ball

Pointing to the better performance achieved by ESG liquid alternative funds, Cerulli advises fund managers to incorporate an ESG focus into their portfolios.

The managers may also be better off by closing down those funds that have disappointed investors with their performance.

Lastly, managers should be prepared to take fee cuts in their stride. Cerulli’s research shows that nearly a quarter of European institutional investors were looking to negotiate higher discounts on management or performance fees.

“We believe that the sector will stabilize. However, managers will need to adapt to asset allocators’ shifting preferences to succeed,” says Dovydavicius.

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