Last year, Deloitte’s 2014 outlook for alternative investments focused on three key topics: Attracting new assets with scale and differentiating strategies, creating a competitive advantage through better data, and managing external relationships and reputational risks. In its recently published 2015 Alternative Investment Outlook, Deloitte first reviews its 2014 projections, and then offers three themes for its 2015 outlook.
2014 Alts Review
While many of Deloitte’s 2014 predictions held true, the firm’s honesty and candor in reviewing its inaccurate projections builds credibility for its 2015 outlook. Deloitte divides its nine 2014 predictions into three categories: Those that turned out as expected, those that partially turned out as expected, and those that did not turn out as expected or remain unresolved.
Four of Deloitte’s 2014 predictions turned out as expected. They were:
- Larger managers will continue to get bigger
- Alternative managers will increasingly engage the retail investor
- The importance of data will continue to grow
- Gathering and normalizing data will prove challenging
It’s certainly true that larger managers have continued to grow, largely thanks to the growing investor interest in alternative investments. This has been due in part to alternative managers increasingly engaging the retail investor, as Deloitte predicted. However, while the importance of data did grow in 2014, Deloitte’s prediction that its gathering and normalizing would be challenging was also right, leaving plenty of room for improvement in that area.
Deloitte also predicted that smaller managers would compete in 2014 by focusing on niche sectors, such as energy. This turned out to be true in part, although with oil tanking in the final three months of the year, a lot of managers likely wish it hadn’t. Other trends predicted by Deloitte that didn’t fully materialize in 2014 were:
- More alternative managers will offer customized reporting
- Alternative managers will increase use of risk-based resourcing models
- Alternative managers will improve oversight of external risks
The only prediction for 2014 that Deloitte got wrong was that alternative managers would “step up their game” in cyber-preparedness: They didn’t, which led to negative outcomes in several cases.
Alts Outlook for 2015
Alternative investments underperformed traditional asset classes in 2014, but as Deloitte points out, alternatives are supposed to have a low correlation to stocks and bonds, so it would be concerning if they had performed in-line with stocks and bonds during a continued bull market in each. The “nimbleness” of the alternatives industry anticipated shifting global dynamics in the creation of scores of new products in 2014, and those products will likely be of increased usefulness in 2015.
Deloitte’s 2015 outlook for alternative investments focuses on three areas:
- Strategic brand risk management
Deloitte says that despite concerns about global growth, there are too many opportunities in emerging markets and elsewhere around the world to ignore. Low interest rates in the developed world have also made it harder for managers to break even, and this is pushing them into new areas, both geographical and investment. But the complexity of doing business overseas leads to costs that make international exposure more onerous for smaller firms, giving larger firms the decided advantage again in 2015, according to Deloitte.
By monetization, Deloitte is referring to the trend of hedge funds and private equity firms raising capital by selling stakes in their businesses. Deloitte thinks this trend, which they missed in 2014, will continue to accelerate in 2015, as aging hedge-fund and private-equity managers plan their successions, and smaller firms raise capital to compete with larger ones.
Finally, Deloitte makes the argument that for the vitality of an investment organization, brand and reputation are “at least as important” as investment performance. As managers have become more risk-aware, more money is being spent to identify and mitigate risk. When bad news strikes, Deloitte says it will be important for firms to have a “brand narrative” and solid corporate communications.
For more information, download a pdf copy of the whitepaper.