Alternative investments remain squarely in the growth phase, with investors across the globe looking beyond absolute returns as they seek to incorporate liquidity needs, regulatory status and transparency when weighing their alternatives allocation decisions. Meanwhile, the definition of what constitutes an alternative investment continues to vary by region and, to a greater extent, by organization type. These dynamics create opportunities and challenges for helping investors fully understand their potential alternatives contributions.
These were among the key findings of a new Deutsche Asset & Wealth Management (Deutsche AWM) survey of investors. “The Alternative Perspective – 2014 Global Survey of Investors in Alternatives” surveyed 373 investment executives from a diverse set of organizations in Europe, Asia-Pacific and the Americas.
“Alternative investments have come into their own, taking a core position in an increasing number of portfolios. More than half of the Deutsche AWM clients whom we surveyed plan to increase their portfolio exposure to these asset classes, with funding most likely to come from cash and fixed income rather than from a reallocation between the various sub-sectors within the alternatives space,” said Dario Schiraldi, Deutsche AWM’s Head of Global Client Group. “Our 2014 Alternative Perspective survey points to a number of ways for alternative investments to validate and expand their role in asset allocation and risk management.”
The survey’s key findings¹ include:
- Investors look beyond absolute returns. While investors expect private equity primaries, single strategy hedge funds, private infrastructure and private real estate to outperform, our survey reveals that liquid alternatives, multi-strategy hedge funds and private equity secondaries may command larger flows, as investors increasingly focus on factors other than absolute returns.
- Liquidity needs send investors down different paths. Liquidity needs vary by organization type and region. Going forward, investors with high liquidity needs will increasingly turn to the expanding universe of liquid alternatives, while those with low liquidity needs will seek to capitalize on that flexibility in the form of higher potential rewards or better fee terms.
- Alternatives are in the eye of the beholder. Differences in the way firms define alternative investments are evident across regions, organization types and experience levels. As firms increasingly come to recognize the specific contributions each alternative asset class can bring to portfolio diversification, each could potentially earn its own allocation, as opposed to competing with each other for space within an overall alternatives alocation.
- ESG is rising in importance. Nearly half of the respondents indicated that Environmental, Social and Governance criteria play some role in their alternative investment process, with ESG implementation most evolved in Europe, followed by North America. As ESG takes on a larger role, firms will develop more structured frameworks for choosing managers who implement these criteria.
- One size doesn’t fit all when it comes to growth. Asia-Pacific arguably offers the most growth opportunity. Respondents from Asia-Pacific overwhelmingly say that they look to alternative asset classes to decrease correlations and improve diversification, versus their Americas and Europe counterparts, who use alternatives for a broad range of reasons ranging from risk reduction to returns enhancement.
- Fee pressure is likely to intensify. Fee negotiation is becoming more commonplace, with investors pushing for better terms based on arguments including being a Day 1 investor and large ticket sizes. Investors across regions and organization types say that the most persuasive argument for a reduction in fees is industry standard pressure.
Deutsche AWM fielded the 2014 Global Survey of Investors in Alternatives between March and April 2014. The global survey received responses from 373 Deutsche AWM clients, including investment executives at banks, broker/dealers, corporate and public pensions, foundations and endowments, family offices, funds of funds, independent wealth managers and high net worth individuals, insurance companies, investment consultants and sovereign wealth funds, among others. Respondents ranged from organizations with less than USD 500 million in total assets under management to firms with greater than USD 20 billion. The largest percentage (27%) manages assets between USD 1 billion to USD 5 billion. Fifty seven percent of respondents are from Europe, followed by the Americas (35%) and Asia-Pacific, excluding Japan (8%).
With USD 1.27 trillion of assets under management (as of September 30, 2014), Deutsche Asset & Wealth Management* is one of the world's leading investment organizations. Deutsche Asset & Wealth Management offers individuals and institutions traditional and alternative investments across all major asset classes. It also provides tailored wealth management solutions and private banking services to high-net-worth individuals and family offices.
*Deutsche Asset & Wealth Management is the brand name of the Asset Management and Wealth Management division of the Deutsche Bank Group. The legal entities offering products or services under the Deutsche Asset & Wealth Management brand are listed in contracts, sales materials and other product information documents.
Survey information as of April 2014. This material is provided for informational purposes only. It is not an offer or solicitation to buy or sell any securities.
¹ These findings represent an aggregation of responses from respondents of the Deutsche AWM 2014 Global Survey of Investors in Alternatives and do not reflect or represent the views or opinions of Deutsche Bank AG.