Asset Management Intelligence - May 2015 - Alternative Investment Industry Outlook for Q2 and Remainder of 2015

Published: May 6, 2015
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Introduction

Following strong performance and resumption in investor inflows in the first quarter, EisnerAmper spoke to a number of asset management professionals to get their perspective on what’s in store for the alternative investment industry this quarter and the remainder of the year. Consultants, investors and managers shared their predictions on allocator activity, strategies slated for best performance and what will happen with fees.

Investor Stance: College and University Endowments

Investors, specifically the largest endowments, are expected to continue to increase their allocations to alternatives, which will ultimately trump traditional investments in their portfolios. The renowned NACUBO-Commonfund Study of Endowments® (“NCSE”) published earlier this year, which tracks data from over 800 colleges and university endowments on their investments and performance, confirmed that they are migrating from the new 60/40 model with 60% in traditional investments and 40% in alternatives to the new new 60/40 model with 60% in alternatives and 40% in traditional investments.

“It has totally shifted in the last nine years or so,” said Cathleen Rittereiser, co-author of Foundation and Endowment Investing and Founder of Uncorrelated, LLC, an “act tank” focused on educating institutional investment leaders. “What it means is they are looking for good quality managers.”

Rittereiser elaborated that higher education endowments have shown a bias toward long/short equity managers, especially with an interest in the handful of former Ziff Brothers Investments money managers who spun out their own hedge funds. Additionally, she said colleges and universities continue to demonstrate interest in activist funds and selectively, if they have an expertise in credit, structured credit.

Strategy Spotlight: FoHFs Favor Equities and Event-Driven

College and university endowments are not the only investor type with their eye on equities and event-driven managers. Fund of hedge fund (“FoHF”) managers also appeared to express an interest.

Michael Dubin, managing director, Silvercrest Asset Management Group, a New York-based $18 billion registered investment advisor, $2 billion of which is in alternatives, said the firm is also looking at long/short and event-driven managers.

“In an economic environment when there is not a lot of growth of top line, there is a lot churning going on, mergers and acquisitions, spinoffs, etc., so that is one positive area,” he said.

He added that U.S. and European equities present attractive investment opportunities due to the price-to-earnings ratio.

Another FoHF manager in Connecticut said he prefers long/short and event-driven opportunities in Europe over the U.S.

“We think toward the end of year and early next year, they are behind the U.S. in terms of an event-driven cycle which will be an attractive investment opportunity,” he said.

Regarding European long/short, he argued the alpha potential is higher because valuations are cheaper.

Less mainstream strategies expected to garner interest include RMBSs and other mortgage strategies in both the agency and non-agency space.

Fees: Top Performers To Defend Their Fees, Despite Investor Pushback

Despite investors continuing to press funds to lower their fees on the heels of last year’s sub-par returns, fees are expected to go to up for the best managers. And top performers will continue to defend them.

“I think that the best managers will continue to command a strong fee structure,” said James Shelton, CIO of Kanaly Trust Company in Houston. “I just don’t see a lot of real success in bringing that down and in fact, we tell clients all the time that we want to pay a higher portion of the fee and performance fees because that means we’re typically doing pretty well, so if you are adding value, you are going to be paying the fees and I can’t do anything about that.”

Alternative investment data provider Preqin’s Investor Outlook: Alternative Assets H1 2015 confirmed that fees are one of the top two issues for both hedge fund and private equity investors this year with over 60% of respondents indicating that management fees can be improved.

Conclusion

If the larger college and university endowments continue migrating toward the new new 60/40 model, the alternative investment industry will reap the benefits of new inflows, in particular long/short equity hedge fund managers and event-driven ones. If FoHFs follow through on their anticipated outlook, they will also help boost the growth in those strategies, both in the U.S. and Europe. And finally, the industry should brace itself for the debate on fees to continue as managers are expected to defend them on the heels of pushback from investors.

Global Economic Outlook

Renowned economists from Wall Street’s top investment banks who wished to remain anonymous said they were bullish on the global economic outlook, pointing to a few indicators. The U.S. unemployment rate has dropped the last few years to 5.5% as of March from its high of 10.0% in October 2009. And further, on the top of employment, unfilled job openings were at an all-time high of 5.1 million as of the end of February, the highest level since January 2001. Also, Europe will benefit from lower interest rates and its Quantitative Easing program.

Asset Management Intelligence - May 2015