Survey: Growth In Alternative Investments Set To Explode

Oct 3 2007 | 11:21am ET

Brace yourselves pension fund portfolio managers: A new report says that the future of investing will be different and more efficient, and the amount of capital inflow into the alternatives space will rival some countries’ gross domestic products.The report, issued by Merrill Lynch and Casey Quirk, says new products entering the market will eliminate “all investment constraints for which there is little economic rationale, such as liquidity of issues, style box adherence, no shorting and no leverage.”

Active alternative investments, including hedge funds, will more than double to around $11 trillion by 2011, the report noted, and less liquid assets, such as private equity and real estate, and new asset classes, such as infrastructure, are among those that will see overall assets under management soar 150% over the next five years.

Specifically, alternative investments will see $2.5 trillion in new flows globally and across all segments over the same period, according to the report, entitled: The Brave New World: Winning Product Strategies for a Changing Global Market.

The report also notes that individuals and institutions will increasingly outsource investment decision making, while continuing to fulfill their fiduciary obligations.

“The ability to deliver investment skill through multiple and changing vehicle structures, such as unified managed accounts and "smarter" defined contribution products, including a wider range of alternative investments, will be important for success in the retail market. One expected outcome is almost $1 trillion in new flows into target risk and target retirement funds over the next five years.”

"Retirement systems around the world are facing significant challenges—savings rates are not sufficient to support the large and growing retired population—and investment managers need to address this problem head-on," said David Heaton, co-head of asset management investment banking at Merrill Lynch. "Successful managers will be in the business of helping clients close this implicit funding gap in a proactive way through new and innovative product strategies."


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