home Latest News The post-crisis alternatives boom: Investors warned to 'approach with caution' – Investment Week

The post-crisis alternatives boom: Investors warned to 'approach with caution' – Investment Week

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Investors are still pondering whether to invest in alternatives despite huge growth

Despite the popularity of hedge funds and other alternative strategies reaching an all-time high among fund buyers, concerns persist about their performance and appropriateness for retail client portfolios.

In the years since the Global Financial Crisis, total assets in the global hedge fund industry have more than doubled from $1.4trn in 2008 to $3.2trn in 2017, according to the most recent data available from Hedge Fund Research.

Over the same period, total assets in alternative mutual funds and ETFs grew from $136bn to $913bn, according to Morningstar.

Alternatives market to grow by $2.5trn in next three years

Brooks Ritchey, senior managing director and head of portfolio construction at Franklin Templeton affiliate K2 Advisors, explained demand has been driven by lower yields and, more recently, by the return of volatility to global equity markets.

He said: “Clients are telling us portfolio construction has become increasingly difficult. Equities have had a ten- or 11-year rally and valuations have become more expensive. 

“Meanwhile, the US has been raising interest rates and European and Japanese yields are low, if not negative. 

“Alternatives offer clients another choice, and since Franklin Templeton started offering liquid hedge and alternative strategies, it has been a real growth area.”

Regulated funds

Another driver of demand is the emergence of regulated retail fund types for alternatives products, such as the 2009 UCITS Directive in Europe, Ritchey added.

He said: “Investors are becoming more comfortable with other types of investments, especially as these are regulated products. 

“If you are going to try a hedge fund, you would start with a conservative regulated product.” 

However, investment manager at Canaccord Genuity Wealth Management Patrick Thomas said although the UCITS wrapper has made these strategies more accessible, funds have too often underperformed in the markets they are designed for.

Allocations to alternatives in sovereign wealth funds increase to almost a quarter

He explained: “You no longer need to go to a very expensive, unregulated private fund with often fairly poor governance.

“There is now a big universe of funds [within UCITS] employing hedge-type approaches, but if you look at the UCITS sector as a whole the results have not been great.

“There has been a long period of underperformance and in 2018 – the one year where the asset class would be expected to add value – most were in negative territory.” 

Divergence of performance

Meanwhile, the HFRI Equity Hedge index, which measures investment managers who maintain long/short positions in primarily equity and equity derivative securities, was down 1.2% for 2018, over which time the MSCI World index lost roughly 3.3%.

However, other hedge strategies, such as volatility-focused managers,  underperformed the index which lost 5% over 2018, according to the HFRX Volatility index.

Thomas said the divergence of performance across strategies makes hedge funds and other alternatives difficult to navigate.

Estimated growth in hedge fund industry assets and growth in alternative mutual funds and ETFs