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, head of product strategy and performance management 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.”
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.