Alternative Investment Industry Outlook for Q4 and Beyond

Institutional investors and family offices alike are on track to continue allocating to various alternative asset classes for the remainder of this year into next despite their concerns, namely hedge funds not meeting performance expectations, high valuations for private equity funds, and cycle risk for real estate, amongst others.  Yet these concurring allocations come on the heels of managers, particularly in the hedge fund space, lowering management fees and boosting incentive fees. Finally, with respect to new fund launches, EisnerAmper has heard that there is a growth in less liquid asset classes and credit strategies.

INVESTOR OUTLOOK

Hedge Funds

Alternative investment data provider Preqin revealed that 69% of the 530 institutional investors surveyed are expected to make their next hedge fund investment this year and 16% will invest in 2019.  Systematic commodity trading advisors appear to be the most popular, followed by macro strategies which offer downside protection in the event of a possible equity market correction.

Additionally, EisnerAmper has heard that family offices are paring down their long/short exposure in anticipation of a market correction in favor of other hedge fund strategies, especially emerging markets and Pan Asia, due to concerns about high pricing in developed markets.

Illiquid Investments: Private Equity/Venture Capital/Real Estate

Preqin revealed that over 86% of surveyed investors plan to increase their private equity investments this year, with more than half committing capital this year and a further 16% expected in early 2019. There is a strong preference toward small to mid-market buyout funds and venture capital.

EisnerAmper can confirm the growth in private equity investments.

“There has been a continued evolution to the conventional private equity mindset that has pushed the boundaries of the ‘typical’ investment in a fund,” said Elena Newman, partner in EisnerAmper’s Financial Services Group. “The private equity secondary market has grown rapidly and has become an active platform for investors to gain exposure to private equity in non-traditional ways.”

In addition, EisnerAmper has heard that family offices continue to eye private equity, venture capital and real estate, especially the increasingly popular qualified opportunity funds.

FEES

As especially the hedge fund industry has experienced the last few years, managers will continue to lower their management fees but increase their incentive fees, a trend EisnerAmper can confirm.

“We’re seeing some lower management fees but higher incentive fees/allocations,” said Jeff Parker, Partner in EisnerAmper’s Financial Services Group. “Some funds are passing through expenses rather than management fees.”

Earlier this year, Hedge Fund Research data confirmed that hedge fund management fees have fallen to a record low of 1.43% in the first quarter as managers seek to entice investors to invest amid sub-par performance.

LAUNCHES

EisnerAmper has seen a mix of new launches this quarter, ranging from hedge funds to more illiquid investments including private equity, venture capital and real estate.

In the New York City area, considered the epicentre of the alternative investment industry, EisnerAmper has seen a mix of these above-mentioned strategies. The West Coast has also seen a pick-up in new launches, both in the hedge fund space and private equity.

“We have seen a pick-up in new hedge fund launches, especially coming out of Southern California,” said Eugene Tetlow, business development manager in EisnerAmper’s financial services group in San Francisco. “Additionally, the firm has seen more private equity launches in and around Los Angeles.”

Meanwhile, across the pond in Europe, Ray Kelly, partner in EisnerAmper Ireland’s Financial Services Group, said the firm has seen an increase in the number of credit launches particularly in light of the continued challenges faced by the European banking system.

“Ireland was the first European jurisdiction to offer a regulated loan-origination fund product and we are seeing an increase in interest in this product,” he said. “When one considers that in the United States, roughly 80% of credit comes from non-bank sources, whereas it is the reverse in Europe, the potential for growth in this area as the European market matures is significant.”

CONCLUSION

As 2018 concludes and 2019 begins, alternative investment managers should be poised for inflows as both institutional investors and family offices are anticipated to allocate to various asset classes. And hedge fund managers especially are expected to keep their fees competitive to lure such allocators.

Asset Management Intelligence – Q4 2018

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• Innocent Until Proven GILTI – Not Anymore: The New Global Intangible Low Taxed Income Regime
• Asset Management Update: FASB Modifies Fair Value Disclosure Requirements
• Alternative Investment Industry Outlook for Q4 and Beyond
• Disruption: Fintech Companies and Lending Activities