Context Summits: 72% of Investors Looking to Increase Alternatives Exposure

Institutional investors remain interested in alternative investments for 2017, , with the sector holding their attention for a second year in a row, according to a survey by Context Summits. The biggest market challenges they see for 2017 include uncertainty on the regulatory front, the Trump administration, and volatility in global markets.

According to John Culbertson, chief investment officer of Context Capital Partners, an investor in alternative avenues, although some of the largest funds saw net outflows in 2016, the hedge fund sector actually saw “its strongest performance in three years” as the markets responded to the UK’s Brexit vote and the election of Donald Trump in the US, “two major low-probability events that caused volatility spikes.”

Mark Salameh, co-founder of Context Summits, a New York-based organizer of events for the alternative asset management industry, reports, “These investors are seeking new managers that can produce strong risk-adjusted returns and help diversify a traditional portfolio from risks in equity and credit markets. The findings provide evidence that the alternative asset management industry continues to grow and mature, with new strategies and ideas entering the market every day.”

Some of the key trends the survey of allocators identifies are:

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For 2017, 72% of investors are looking to increase their allocations to alternative fund managers, compared to 79% for 2016
About 68% of investors are looking to reduce their cash holdings by year-end, compared to 62% for 2016, showing their willingness to take on risk
Investors are looking to allocate money to an average of 5.49 funds
They are positive about alternative investments’ ability to generate risk-adjusted returns, with 51% of investors optimistic and 36% neutral
Investors are open to new ideas and plays, with 59% looking to allocate funds to newer “emerging” managers over established managers
The main metrics they use to evaluate fund managers are investment process, performance and assets under management. The factors they pay the least attention to are redemption and lockup terms, operations, and length of a manager’s track record.
Even though these investors are open to newer managers, they are looking for annualized returns of 10.9% on average from hedge funds.

Culbertson notes, “Going forward, we expect the next 12 months will serve as a critical marker for the role of alternatives in an institutional portfolio. Alternative managers and allocators need to adapt to proposed policy changes from the new administration, as well as react to concerns about interest rate normalization in the US and the implications of Brexit in Europe.”

More than 200 institutions – including fund of funds, endowments, pension funds and sovereign wealth funds – participated in the Context Summits survey, according to the company.

Tags: Alternative Investments, Alts, Brexit, Context Summits, Donald Trump, Survey

While many pension funds are switching to passive investments to save money on fees, Yale University’s endowment has staunchly defended its actively managed investing strategy against so-called “fee bashers” in its most recent annual report.

“In recent years, a broad range of market commentators have decried excessive fees paid to hedge funds and private equity funds,” said the Yale Endowment in its 2016 annual report. It went on to say that what the “fee bashers miss is that the important metric is net returns, not gross fees.”

Yale said its investment strategy emphasizes long-term active management of equity-oriented, often illiquid assets. It added that performance-based compensation earned by outside active investment managers reflects the endowment’s outperformance, and boasted that it had the highest investment returns among all colleges and universities over the past 20 and 30 years, citing Cambridge Associates.

“Weak or negative returns would result in low or no performance-related fees, but would be a terrible outcome for the University,” said the endowment. “However, Yale has demonstrated its ability to identify top-tier active managers that consistently generate better-than-market returns, after considering performance fees,” said the report. “Yale’s returns net of fees are superior to the returns of the low-cost index-tracking vehicles.”

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The endowment said that over the 10-year period ending June 30, 2016, it earned an annualized return of 8.1%, net of fees, which put Yale among the top 3% of colleges and universities.

“In the past 10 years, nearly every asset class posted superior returns, outperforming benchmark levels,” said the endowment. “Over the past decade, the absolute return portfolio produced an annualized 5.9% return, exceeding the passive Barclays 9- to 12-Month Treasury Index by 4.2% per year, and besting its active benchmark of hedge fund manager returns by 3.5% per year.”

The university acknowledged that instead of paying fees to active managers, it could instead invest in low-cost passive index strategies, which it said made sense for endowments and foundations that lacked the resources and capabilities to pursue active-management programs. It added that although the university would have paid lower fees if it had invested in a passive index strategy over the past 30, it would have meant dramatically lower net returns.

The report said that if Yale’s assets had been invested in a portfolio of comprised 60% of US equities, and 40% of US bonds over the past 30 years, the endowment would have been reduced by more than $28 billion.

“Strong active management contributes to Yale’s outstanding absolute and relative investment performance,” said the report. “While passive investment strategies result in low fee payments, an index approach to managing the university’s endowment would shortchange Yale’s students, faculty, and staff, now and for generations to come.”

Tags: Active Management, fee, Yale