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Institutional investors are boosting alternatives allocations in hunt for outperformance, finds new report from BNY Mellon

Nearly 40% favor private equity, followed by infrastructure and real estate; Fees and transparency firmly in investors' sights 

Institutional investors are seeking to allocate more of their capital to alternative strategies in a quest for strong returns in the low-interest-rate environment, according to a new study from BNY Mellon.

The report, Split Decisions: Institutional investment in alternative assets, produced by BNY Mellon in association with FT Remark, found that among the various alternative asset classes, private equity is most favored by institutional clients, accounting for 37% of their exposure, followed by infrastructure (25%), real estate (24%), and hedge funds (14%).

According to the study nearly two-thirds of investor respondents said that alternatives had delivered returns of at least 12% last year, while more than a quarter said the strategies had earned 15% or more.

"Alternatives continue to gain share in portfolios, but institutional investors are becoming more selective about where and how they deploy their capital," said Frank La Salla, CEO of Alternative Investment Services and Structured Products at BNY Mellon. "As a result, they are demanding greater transparency from their alternative fund managers. This survey reinforces the notion that investors and fund managers alike will need growing levels of support, insight and data to make informed decisions."

Key findings from the report include:

  • Thirty-nine percent of respondents say they will increase their allocations to alternative investment types, while just 6% say they will moderately decrease it.
  • When it comes to private equity investments, 62% of respondents say they will look for lower management fees and 55% say they will request more transparency as they seek to optimize value.
  • Distressed strategies are the most attractive when it comes to hedge fund allocations, with 68% of investors currently having exposure to them and 58% ranking them as one of the three most attractive strategies for the coming 12 months.
  • Fee pressure from investors is leading 78% of hedge fund respondents to say that they will consider reducing their management fees over the next 12 months.
  • Emerging markets, on average, now make up 31% of institutional investors' alternative allocations. APAC-based investors account for the highest EM share at 54% of their alternative portfolios, followed by investors in EMEA at 29% and the Americas at only 16%.

"The continued growth in alternative allocations will be supported by a steady stream of new products and strategies as fund managers cater to increasing amounts of capital headed toward alternative assets," said Jamie Lewin, managing director and head of manager research at BNY Mellon Investment Management. "Innovation and adaptability will be two key differentiators that determine which firms succeed in capturing what's become an integral part of institutional portfolios."

A BNY Mellon survey released in May, prepared in collaboration with Preqin, showed that a significant percentage of infrastructure, real estate and private equity managers expect their assets under management to grow by at least 50% by the year 2020. That study found that global demographic and macro-economic shifts are driving an unprecedented need for investment in real assets such as transport facilities, communications networks, housing and hospitals. In addition to institutional investors, the report also suggests high net worth and retail investors are likely to become a more important source of capital in the next five years.

For the Spilt Decisions paper, BNY Mellon commissioned FT Remark to survey 400 senior executives from institutional investors around the world, including pension funds, investment managers and insurance funds, to understand their approaches for allocating capital to alternative investments. At the same time, FT Remark also interviewed 50 hedge fund executives to gain insight into how they are reacting to a changing regulatory environment and rising demands from their institutional investor clients.

FT Remark produces bespoke research reports, surveying the thoughts and opinions of key audience segments and then using these to form the basis of multi-platform thought leadership campaigns. FT Remark research is carried out by Remark, part of the Mergermarket Group, and is distributed to the Financial Times audience via FT.com and FT Live events.