Alternative Investment Industry Outlook for Q2 and Beyond in 2016

Despite the fact that hedge funds underperformed the first couple of months of the year until March, the overall challenging markets have not deterred investors from continuing to express interest in the alternative asset class, even though trustees of the New York City Employees’ Retirement System recently voted to redeem from hedge funds. Long/short equity managers, many sector-focused, are a popular choice amongst allocators, along with macro portfolios in hopes of capitalizing on the significant macro uncertainty, at least in the medium-term. Given those investor preferences, perhaps it is no mere coincidence that the majority of hedge fund launches in the next year are expected to be long/short strategies, many sector-specialists, along with macro offerings.

Meanwhile, private equity is also expected to continue to garner a lot of attention, both from investors, and in terms of new launches.

Hedge Funds

Both family offices and institutional investors are looking at long/short equity managers, many sector-focused. According to one capital introductions professional in a prime brokerage group, family offices are specifically eyeing long/short managers focused on health care, energy and regional banks, many to managers with less than $100m in assets under management. Meanwhile, one small endowment also recently hired a health care-focused long/short equity manager and is exploring macro opportunities going forward given the significant macro uncertainty in the medium term.

There is no shortage of upcoming launches focused on long/short equity specialists and macro to accommodate investor demand.

“We are seeing a continuation of 2015 and given the recent rebound in the equity markets, we anticipate the trend will continue through 2016,” said Jaclyn Greco, Manager, Business Development, in EisnerAmper’s Financial Services Group. “A number of new launches are spinning out of the big hedge funds and are focused mainly on specific sectors which include energy, consumer, and TMT or strategies including long/short equity, distressed, macro and specialty credit.”

Private Equity

Private equity and venture capital continue to be popular amongst allocators.

Sean Holland, former Manager of Private Equity – International, Venture Capital and Special Situations at the New York State Teachers’ Retirement Systems, said that that early-stage venture, infrastructure and distressed are tactical themes that are gaining significant investor attention.  In addition, he specified co-investments remain popular but successful execution requires timely judgement and coordination with the lead investor.

“Given dampened return expectations from traditional asset classes in domestic markets, the importance of allocating to alternative investments should remain firm and possibly increase among institutional investors seeking outperformance,” he said.

Seemingly, there are more launches focused on these private equity opportunities. Todd Hankin, Partner in EisnerAmper’s Financial Services Group based in San Francisco, specified there is continued interest in the fintech space, hybridization of early stage venture capital/later stage private equity funds and real estate funds.

“We are still signing up new business for 2015, an indication of the stress of the market, and there seems to be no letup,” he said. “We are seeing a lot of activity in these spaces and it seems like it is going to continue into the second quarter.”

Conclusion

Between upcoming investor allocations from both institutions and family offices, along with more launch activity, outlook is positive for the alternative investment industry, especially for long/short equity specialists, followed by macro offerings, along with numerous private equity and venture capital opportunities. And further, with an eye on emerging managers or managers less than $100m in assets under management, some of these new launches spinning out of the big hedge funds should also be well-positioned for allocations.

Download PDF

Asset Management Intelligence - Q1 2016

• The SBIC Advisers Relief Act: Impact and Opportunities
• What Is a Liquidating Trust?
• What Regulatory Risks Do Unregistered Investment Advisers Hold?