STONE MOUNTAIN CAPITAL RESEARCH PERSPECTIVE VOL.46
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Alternative asset management is a growing industry, where investors seek diversification to their traditional long only investment portfolios. According to PWC, a significant increase in the assets under management (AuM) of alternatives is anticipated over the next quinquennium, reaching the levels of $15.3tn with hedge funds expected to contribute one third to that amount, which means an increase of $2tn in their AuM. Main drivers of this increase are risks associated with the geopolitical environment of investments. Major determinants of the new risk framework are Brexit discussions, major country elections and Euroscepticism in Europe, the new U.S. government and FED’s policies incertitude in the U.S., and mixed signs for growth globally. Investors are in a quandary regarding their allocations amid the current uncertainty, and are scrutinizing investment opportunities that will allow them to navigate profitably during the new era. Risk and uncertainty are two coherent terms, but different, while investors are keen on identifying the key risks in their investments. The recent spike in the number strategies (both active and passive) seeking ‘alternative risk premium’ highlights the importance of identifying risk factors.

The new era of presidency in the U.S. is marked with significant changes, with the Treasury Secretary announcing tax reforms in the next six months and the FED ready to increase rates. Hedge funds have momentum and they extended their January gains into February, with CTAs posting the biggest returns according to HFRX index. Equity hedge, macro and event-driven strategies exhibited similar robust performance and proving that they overcame last year’s underperformance and they gaze into the future with confidence. A Preqin survey evidence a large increase in the number of alternative investors and the performance of alternative asset classes is encouraging for the future of the industry. In debt markets, the risk retention regime leads to lower volumes in CLO issuance and fewer deals. There is an increasing appetite for private debt strategies and the economic outlook may suggest a growth in commitments over the next two years. There are more funds focusing on European credit, which is indicative of the opportunities in the space amid a relatively uncertain political scenery. Private equity fundraising continues in solid pace, while competition for deals is increasing rapidly alongside the number of funds in the market. Adding hedge funds, that compete for similar deals, makes the identification of opportunities even harder. Both private debt and equity strategies focus on the mid-market spectrum as the opportunities there are more attractive. The same scenery prevails in real estate industry with high prices and increased competition being the main feature. The investment activity slowed down and the macro outlook with interest rate growth expectations and political uncertainty are the most significant drivers behind the slowdown. 

STONE MOUNTAIN CAPITAL RESEARCH PERSPECTIVE VOL.37

The economic conditions being shaped during 2016 could be the vanguard of the investment environment for the years to come and there is certainly one winner: alternative investments. Over the last decade, the industry has grown exponentially, with alternative funds managing currently near $10 trillion, with huge demand being originated from the U.S. and European investors. There is a variety of strategies/asset classes within the alternative investment spectrum from hedge funds and private equity to stamp, comic books and classic car collection, but this perspective’s focus is on institutional quality alternative investments and specifically hedge funds, private equity and private debt comprising the largest piece of the spectrum.
 
The role of alternative investments in the financial and social ecosystem is multidimensional, which amplifies their importance and attracts further attention from investors and authorities. First of all, the plethora and diversity of strategies allows investors to gain their desired exposure, adding liquidity to both financial and real-world markets. Alternative managers are focused on innovation and designing new, unique and sometimes complex trading/investment strategies, which provide institutional investors with alternative, diversified and uncorrelated to traditional investments source of alpha. Investing in alternative managers requires expertise in risk management, thorough knowledge and deep understanding of alternative investments due to their complexity in nature, including both strategy and structure.
 
Sophistication within alternative investments has developed providing a variety of access possibilities for institutional investors across the corporate capital stack from traded debt in high yield bonds, collateralized loan obligations (CLOs) to more illiquid private debt strategies of levered loans, direct lending, and private equity featuring buyout and secondaries.