Appetite For Alternative Investments Grows

Jan 6 2015 | 8:20am ET

By Sang H. Lee
Founder and CEO, DarcMatter

Alternative investments have been on the rise since 2005 as more investors and financial advisors explore investment options outside of traditional stocks and bonds. Alternative investments vary and take the form of hedge funds, private equity, real estate, commodities, managed futures, commodities, venture capital, and financial derivatives. Recent reports and studies from McKinsey & Company, Preqin, and Deloitte indicate that the appetite for alternatives is on the rise and will continue through 2015.

Taking a look back at alternative and traditional investments, here are the three main takeaways.

1. The global AUM of alternative investments has risen by 119% over the last 8 years from 2005 to 2013. In 2013 the total global AUM of alternative asset classes was $8.1 trillion versus $3.7 trillion in 2005. Taking a closer look, the largest growth in alternatives was in hedge funds and real assets. From 2005 to 2013, real assets had a compound annual growth rate (CAGR) of 11.6% while hedge funds had a CAGR of 11.4%.

Source: McKinsey & Company, "The Trillion Dollar Convergence: Capturing the Next Wave of Growth in Alternative Investment."(2014)Source: McKinsey & Co., The Trillion Dollar Convergence: Capturing the Next Wave of Growth in Alternative Investment (2014)

2. The CAGR for alternative investments was nearly double that of traditional investments in the public market from 2005 to 2013. Given that the alternative investment market has been rising, how does this compare to traditional investments? As the infographic shows, alternative investments had a CAGR of 10.7% versus traditional investments’ CAGR of 5.4% from 2005 to 2013. It’s interesting to note that during the financial crisis, the global AUM of traditional investments significantly decreased by 18% while the global AUM of alternative investments did not experience a dip and remained stagnant.

Source: McKinsey & Company, "The Trillion Dollar Convergence: Capturing the Next Wave of Growth in Alternative Investment." (2014)Source: McKinsey & Co., The Trillion Dollar Convergence: Capturing the Next Wave of Growth in Alternative Investment (2014)

3. While growth rates for alternatives are exceeding that of traditional investments, the latter continues to make up the majority of the dollar investment amount. While data is showing the increasing popularity and growth of alternative investments, traditional investments continue to make up the majority of global AUM of investments. In 2013, traditional investments made up 89% of the global AUM of investments versus alternatives’ 11%.

Given the increased volatility and macroeconomic uncertainty in traditional investments, it doesn’t look like the demand for alternative investments will dissipate anytime soon.

According to a McKinsey & Company’s report, it is estimated that three-quarters of investors expect to maintain or increase their investments in alternatives over the next three years. Furthermore, provided the proliferating online investment platforms in fintech for both retail and institutional investors, accessing alternative investment opportunities will only become easier and transparent. Platforms such as DarcMatter will help issuers and investors more efficiently connect online. Here’s to 2015 and the continued growth of alternative investments.

Sang H. Lee is the CEO and founder of DarcMatter, an online investment platform providing retail investors transparent and institutional-level access to alternative investments. Formerly an investment banker in the energy field at WestLB and BNP Paribas, Sang has accrued a wealth of expertise in financial regulation, business, and financial structuring. He has significant experience in the advisory and execution of more than $10 billion equivalent of energy transactions in North America. During his career, Sang was focused on structuring, credit analysis, documentation and deal execution for complex transactions involving multiple investor groups, institutional investors, and financing products from major investment banks.

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