Due to the uncertainty in long-term returns for equities and
fixed income and declining funding ratios, institutions have poured tens of
billions of dollars into alternative investment strategies — real estate,
private equity, hedge funds, venture capital, real assets and credit — at the
expense of long-only money managers. The inexorable move into alternative
investments by institutional investors is reshaping the money management
business.
According to Pensions & Investments’ data, close to $1
trillion invested in alternative strategies by the 200 largest U.S. defined
benefit plans as of Sept. 30, up from $680 billion as of Sept. 30, 2008, money
hemorrhaging from old-fashioned managers over the past 15 years has been
substantial.
A number of large, institutionally oriented private equity
and hedge fund managers wasted little time in expanding their businesses from a
single focus to converge a broader spectrum of alternatives investment
approaches including:
- The Blackstone Group LP, which managed $271.7
billion in private equity, real estate, credit, hedge funds of funds, credit
and mutual fund strategies;
- The Carlyle Group LP, which managed $198.9
billion in private equity, real estate, and hedge funds- and real estate funds
of funds;
- Apollo Global Management LLC, which managed a total
of $159 billion in private equity, real estate and credit strategies;
- KKR & Co. LP, which managed $102.3 billion
in private equity, real estate, energy and hedge funds-of-funds approaches;
- Fortress Investment Group, which managed $62.5
billion in private equity, credit, global macro hedge funds and long-only
strategies; and
- Och-Ziff Capital Management Group LLC, which
managed $42.6 billion in hedge fund, real estate and credit strategies.
Hedge fund managers are moving away from their more liquid
flagship strategies that have monthly or quarterly liquidity toward lockup
periods of between three and five years.
Longer lockups
Crestline Investors Inc., Fort Worth, for example, has
maintained its hedge funds-of-funds commingled and separate account strategies,
but led by high-returning opportunities, moved into credit- and
distressed-recovery funds with much longer lockups. As early as 2004, the
firm's investment team found that the liquidity premium is highest in the one-
to three-year lockup range and going forward, continued to find that credit
opportunities were much better suited to a fund vehicle with less liquid
redemption terms. As of March 31, Crestline's opportunistic and private credit
strategies accounted for 36% of total assets of $7.6 billion, growth of $2.7
billion since their introduction in 2004. Assets managed in hedge
funds-of-funds business totaled $2.7 as of the same date, while $2.2 billion
was managed in hedged beta strategies.
Specialist alternative managers are being encouraged to broaden
their investment capabilities by two main factors — investor demand for
solutions-based approaches and a need to diversify beyond their original forte.
Institutional investors want more global alternative investment strategies from
a single manager.
Private equity managers, especially midsized firms, are more
readily facing the fact that their ability to raise money is highly dependent
on the performance of their last fund. And big private equity money management
firms are being goaded into adding new investment strategies because the days
of raising the next ever larger buyout fund are not certain anymore.
Sources were divided on whether building, recruiting or
buying the needed investment capability is the best option for alternative and
traditional money managers. While there are plenty of hedge fund startups that
are good, but struggling to raise assets, for acquirers to choose from, the
success rate of implementing new investment teams remains low.
Grosvenor Capital Management LP, Chicago, is one of the
few firms to have successfully incorporated new investment teams in its
culture. A hedge funds-of-funds manager by legacy, Grosvenor managed $25
billion for an institutional client base that increasingly used Grosvenor to
create customized hedge fund separate accounts or for advice on investing
directly in hedge funds. In January, the firm completed its acquisition of the
Customized Fund Investment Group from Credit Suisse Group AG. The Swiss bank
was forced by the Volcker rule to sell some of its riskier assets. The
customized unit managed $20 billion in private equity, real estate and
infrastructure funds of funds.
Hedge fund-like
One part of the investment management industry is large
mutual fund firms with broad distribution networks that have been hiring or
acquiring hedge funds-of-funds managers to run daily-valued mutual funds using
hedge fund-like strategies. An example includes Fidelity Investments'
hiring of Arden Asset Management LLC and Blackstone Alternative Asset
Management as subadvisers for funds on its wealth management platform.
Eventually, daily-valued hedge fund-like mutual funds will
likely make their way into defined contribution plans or at least as a
component in their target-date funds. But for the moment, most of the demand
for alternatives mutual funds is from retail investors.
One way to make the industry's growth into alternatives
clearer is to look at a spectrum on which the most liquid investments,
exchange-traded funds for example, are on the left side; mutual funds, liquid
alternatives and hedge funds are in the center; and the least liquid
investments, namely real estate and private equity, are on the right.
It can be predicted that most of the growth over the next
three to five years will be in the middle of the liquidity spectrum as retail
investors seek better returns, but noted that less liquid strategies also will
grow, just more slowly.
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