By David Frank, CFA | CEO & Managing Partner
Over Stonehaven’s 14 year history we have witnessed and played a role in many shifting dynamics across the alternative investment industry. We are well-positioned in the marketplace to see trends with a 26 person platform representing over 20 asset managers to the global investment community.
Following are the top trends we are actively discussing amongst our team members, managers, and investors.
1. Fund flows into alternative investments will continue at a strong pace.
While there might be one or more large allocators that exit the hedge fund space similar to CALPERS, the overall trend of large institutions increasing their allocation to alternative investments is likely to continue.
Portfolio construction has historically relied on the twin pillars of equities and fixed income, one typically helping offset the other in different market environments with both providing returns above inflation over a longer time horizon. However, today’s fixed income markets provide extraordinarily little potential upside to help offset a theoretical sell-off in equities with US 10yr yields at 1.95%, British at 1.60%, German at 0.49%, Japanese at 0.26%, and Swiss at 0.18%.
Institutions are likely to continue increasing investments in alternative investments that can provide more stable returns with low correlations as fixed income surrogates. Given this role, it is no surprise that return expectations have come down. Furthermore, the focus on stability has driven investors toward the largest managers with brand names. For many investors the focus on conservatism outweighs other factors.
Alternative investments are also competing for the equity allocations of traditional portfolios as institutions accept that hedge funds aren’t an asset class but an organizational structure where a large portion of the asset management industry’s top talent resides. Increasingly institutions are removing alternatives as a bucket and considering how to use alternatives across all aspects of their portfolio construction.
analyzing social media data are likely to benefit alongside the managers utilizing media to enhance their brands.
10. The institutionalization of the hedge fund business will increase demand for institutional capital raising firms.
Raising capital has become increasingly difficult for emerging managers at the same time that break-even AUM levels for managers continues to increase. The decreasing percentage of capital managed by FOFs has also spread the sources of capital among a larger number of institutional investors. This means that the capital raising process requires relationships with a larger number institutions and the ability to address increasingly institutional demands.
Managers increasingly want much more than just introductions to potential sources of capital. They want an end-to-end solution to the entire capital raising process. Beyond the day-to-day sales efforts, the services most needed are strategic market positioning, sales strategy management, sophisticated pipeline tracking, analysis of fund structure options, compliant delivery of content, roadshow logistics organization, etc. Capital raising firms that have the experience building many emerging managers into large institutions are able to act as a sounding board for managers to execute growth plans. Capital raising firms that can combine deep relationships, product know-how, technology, and project management to enhance their execution ability will outperform relationship-only providers and pure-play technology platforms attempting to match managers with investors. These institutional class capital raising organizations will play an increasing role in helping build momentum behind many of today’s leading asset management firms.
Prepare for the worst, hope for the best, and count on surprises in 2015. We wish you a terrific year, and please reach out with any feedback.