Globally, there are around 8,500 hedge funds, with about $3tn of assets. This number has remained broadly constant for the last four or five years. This masks a major shift, however, as the total asset base of the industry is increasingly concentrated in fewer managers; the top 10 managers globally manage well over 10 per cent of global assets. More than 80 per cent of hedge fund assets are in funds of more than $1bn. In effect, what’s happening is that the hedge fund industry is consolidating in the same way that the conventional asset management industry has done over the last 20-30 years. Major investors need to deal with large asset management groups with consistent and resilient infrastructure, and non-specialist investors want to deal with brand names they recognise.
Increasingly, major hedge fund firms are, organisationally, looking like conventional asset management first, at the same time as conventional asset management firms are adding hedged or alternative product.
Other alternative asset classes such as private equity, commodities, infrastructure, and the like are gaining ground rapidly, but are still more likely to be found in institutional portfolios than retail. We are well on the way to full integration of “alternatives” into the mainstream asset management ecosystem.
Although according to SEBI there are now 235 registered alternative investment funds in India, it’s still hard for clients in India to construct a portfolio of alternative investments, due to the (current – it’ll change!) lack of suitable vehicles. However, there are some good lessons to be learnt from the alternative investment approach, that’ll make client portfolios more resilient. And from a professional perspective, advisors who have studied alternative investment techniques will be superbly placed to benefit as the market opens up.
Many clients may have real estate investments. Surprisingly (to them!) this is an anchor to many alternative investment portfolios. The combination of illiquidity, regular yield, and relative resilience to short-term shocks, makes real estate very attractive. It’s a genuinely non-correlated asset, and what’s more, it’s one of the few ways that non-professional investors can introduce leverage into their portfolios. So, when reviewing client portfolios, always be aware of any real estate investment within the mix. Even if the client doesn’t necessarily see this as part of their portfolio mix… it is, and it’s important.
Private equity is a cornerstone of many professional investors’ portfolios, and can offer good, uncorrelated returns but at the expense of three to seven year lockups, and structures only available to sophisticated investors. But “private equity” is really only shorthand for investing in shares in companies, outside a stock market. While this requires research and a keen awareness of risk, it’s something that any reasonably savvy middle income investor could do, with some help from their advisor.
Infrastructure investment is typically a big-ticket investment, outside the reach of individuals, but an awareness of the sums flowing to infrastructure investment these days might encourage your clients to look more closely at investing in the shares of promoters of energy, transportation, and other infrastructure-heavy industries, whose cost of capital is likely to fall.
Finally, don’t forget gold! While bank interest in India means that there’s still a yield on cash, that’s not the case in much of the developed world. Gold, the “barbarous relic” (so called as it generates no yield) may well regain some of its shine for sophisticated global investors as its zero yields begins to compare favourably with other traditional stores of value such as cash and government bonds. Your clients holdings of gold, far from being a cultural anachronism, may soon appear to be prescient alternative investments! Alternative investments aren’t a fad. They are today’s reality for investment professionals.
The author Jo Murphy is Managing Director, Chartered Alternative Investment Analyst (CAIA).