Citi Sees Boom in Unconstrained Long, Smart Beta and Liquid Alts

Citi Sees Boom in Unconstrained Long, Smart Beta and Liquid AltsCiti Business Advisory Services recently published the results of its sixth annual Industry Evolution Survey, as part of a lengthy white paper titled Increasing Institutional Portfolio Complexity & the Resulting Shift from a Product to a Solutions Mindset. The findings are based on Citi’s interviews with more than 100 firms totaling an astounding $25 trillion in assets under management (AUM), and they reveal an accelerated shift to the use of alternative investment strategies to complement the traditional portfolios of retail and “mass affluent” investors.

Five-Year Trends

Based on 5-year CAGRs (compound annual growth rates), Citi projects the market for publicly traded funds to leap from $40.8 trillion in 2014 to nearly $57 trillion by the end of 2019, while strategies tied to market indexes will fall from 84% to 76% of the total. By Citi’s calculation, actively managed long-only funds tied to benchmarks will continue to garner the largest share of investment dollars, but will continue to lose market share; while unconstrained long strategies will move into second-place, ahead of passive benchmark strategies, the current runner-up.

Alternative Strategies

Citi sees the liquid alts product category growing from $817 billion in 2014 to $1.7 trillion over the next five years, as retail and “mass affluent” investors become convinced that stocks and bonds alone are unlikely to provide sufficient diversification. So-called smart-beta strategies are also expected to grow, from $265 billion in 2014 to $1.1 trillion by the end of 2019. Liquid alts and smart beta – along with unconstrained long strategies – constitute a triumvirate of alternative strategies investment advisors are looking to bundle into single products to provide portfolio construction, risk management, and investment oversight for retail investors.

“Rather than running 95% to 100% invested against a specific market index, we see active long only managers moving to strategies that will run between 80% and 120% net long with this asset pool projected to grow from an estimated $6.8 trillion in 2014 to $14.9 trillion in the coming 5 years,” said Sandy Kaul, Global Head of Business Advisory Services within Citi’s Investor Sales unit, in a recent statement announcing the release of the survey’s findings. “Creating a more resilient, flexible and diversified portfolio solution for retail and wealth clients is a priority for the asset management industry to help manage the wave of retirement money coming from the baby boomers in coming years.”

Citi projects liquid alternatives gaining share within the broader alternatives market over the next five years, from 10% in 2014 to 15% by the end of 2019.

Why MACS?

Why is the industry moving away from traditional and passive investment products to more active and alternative ones? According to Citi, it has to do with the convergence of asset managers, hedge funds, and private equity firms, which is resulting in an explosion of new products aimed at the retail investor, but often employed by institutions and wealthy individuals, too.

Citi refers to these products as “MACS” – or “multi-asset class solutions” – which are dynamically managed and intended to be used as the “building blocks” for more robust investment strategies. These products, which include alternative mutual funds and ETPs, as well as alternative European UCITS funds, can provide retail investors with exposures to increase their portfolios’ diversification, while also appealing to institutional investors for their enhanced liquidity and transparency features.

For more information, download a pdf copy of the white paper.

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