In this edition of Performance Magazine, we thought it would be interesting to take a closer look at some of the issues facing a sub-sector of the industry—the alternatives sector.
This sector has seen significant growth in AUM in recent years and is now recognised to be an important element of a balanced investment portfolio. In fact, when you consider that an accepted definition of alternative is “an activity that departs from or challenges the traditional norms,” and the fact that approximately 80 percent of institutional investors already have some level of exposure to Alternatives, you could argue that the term “alternative” is becoming outdated.
In many ways, the alternatives industry faces many of the same issues as those affecting the investment industry as a whole: regulation, changing distribution patterns and the impact of Millennials, the increase in ETFs, disruptive technologies such as Blockchain and Robotic Process Automation (RPA) to name but two, and that’s not to forget alpha generation.
As a whole, returns provided by the Hedge Fund sector in the recent past have fallen below expectations, and have led to closer scrutiny by investors, especially around fee models. Hedge Fund firms will need to continue to differentiate themselves and show added value. We explore one particular area where Hedge Fund firms might look to in the future—that of impact investing.
We were fortunate to have Alan Flanagan, Global Head of Private Equity and Real Estate Fund Services at BNY Mellon give us his thoughts on the trends affecting private equity, real estate and infrastructure. As well as responding to some of the challenges, Alan highlighted a number of opportunities for those firms to play a role in the financing of the services required due to the trend toward urbanization. Financing previously provided by governments or the banking sector may no longer be there, creating an opportunity for alternative sources of finance. Readers may want to read Financing the Economy 2016, released by AIMA, for more information on this.
The alternatives sector is composed of large-scale users of asset servicers— those who provide back- and middle-office services. It is important for asset servicers to stay abreast of developments also to optimise the services they provide, and we have analysed the key disruptive technologies facing the asset servicer community.
In summary, like all parts of the investment industry, the alternatives sector faces a number of significant challenges—and opportunities. How long the sector continues to be considered “alternative” is a question for another day!