Context Reports Allocators are Upbeat on Alternatives

Context Reports Allocators are Upbeat on AlternativesMarket volatility, geopolitical risk and the extended bull market are not deterring investors from increasing their allocations to hedge funds in 2016, according to a new report from Context Summits. In fact, nearly 80% of allocators intend to increase their allocations to hedge funds in 2016. In the report, Context also finds that allocators are upbeat about the potential benefits of alternative investments, seeing them as a “prudent play for the current markets cycle.”

The report, titled 2016 Context Summits Allocator Trends Report, was released just yesterday as part of an investor panel discussion hosted by the Texas Hedge Fund Association and the CFA Society of Dallas/Fort Worth. The results of the survey were reviewed during the event, which also featured a keynote presentation by Mark Yusko, CEO and CIO of Morgan Creek Capital Management.

Investment Process Most Important Factor

Interestingly, investment performance is not the most important factor in making allocation decisions. Ahead of performance, allocators first look at the investment process of a manager, along with risk controls – both being important components of the results that a hedge fund manager produces.

At the same time, and contrary to widely held views, asset levels of a manager tend to be the least important factor in selecting a manager. However, given various studies showing that smaller managers outperform larger managers, this should not be a surprise.

Context Summits Allocators Report Decision Criteria hedge funds

According to the survey, which was conducted at the Context Summits Miami event in February, allocators look to alternative fund managers for the following three reasons:

  1. To diversify traditional equities and fixed income portfolios;
  2. To provide downside protection; and
  3. To offer capital preservation during periods of extreme market stress and uncertainty.

Participants in the Miami summit included family offices, fund of funds, endowment pensions, and investment consultants. In all there were 1,800 industry professionals, including 450 funds and 500 allocators with total assets under management (“AUM”) of $1.5 trillion. Two hundred allocators participated in the survey.

Longer-Term Focus

The allocators at the Miami summit were mostly “undeterred” by volatile markets, fears of a U.S. recession, negative interest rates, and the drama surrounding the 2016 presidential election. They acknowledged these and other headwinds, such as geopolitical crises and overcrowding of positions, but remained “enthusiastic” overall. Allocators’ cash positions have dwindled as they’ve become more fully invested.

Other findings include:

  • Allocators are seeking safety, not size, by emphasizing risk controls over AUM;
  • More allocators are making allocations to multiple funds and favoring emerging managers over more experienced managers;
  • Allocators are backing up their optimism with overweight allocations to hedge fund strategies;
  • Market uncertainty and a lack of alpha opportunities are allocators’ biggest concerns, with geopolitical crisis and a stock-market collapse cited as tail risks; and
  • Allocators say Federal Reserve rate hikes won’t impact their behavior.

Context notes that the Miami Summit took place on February 2-3 – just prior to the stock market’s recent bull run – and thus, responses may not fully represent current sentiments.

For more information, visit the Context Summits website to register and download a full copy of the report.

Jason Seagraves contributed to this article.