Report: Alternative Investments To Become Mainstream

Dec 12 2007 | 12:26pm ET

A new report by Putnam Lovell says that public and private asset management firms, both traditional and alternative, will capture 33% of all assets under management by 2012, up from 24% today.

However, traditional active management, long-only stock and bond portfolios charging asset-based fees will contribute less than half of total industry revenue by 2012, down from about 69% in 2006, according to the report, entitled After the Belle Époque, the Future of Fund Management. 

Rather, more than 50% of revenue will come from performance fees, with alternative investments rapidly becoming mainstream and long-short extension strategies proliferating. Firms primarily reliant on long-only mutual funds will be under the most severe pressure to reinvent themselves or lose business.

In addition, hedge funds, now in more challenging markets, will be more easily distinguishable and institutional-grade firms generating strong performance in all market conditions will gain further market share at the expense of lesser competitors. The report predicts that roughly 20% of the current total, approximately 2,000 funds, will disappear in the next five years.

“The days of relying on tax advantages and government subsidies to spur retirement savings and growth in the fund industry are over,” said Ben Phillips, managing director and head of strategic analysis at Jefferies Putnam Lovell, and author of the new report.

“Individual investors, Asia, and sovereign wealth funds will be major sources of new business in the next five years. Yield rather than asset accumulation will increasingly be the focus of investors, boosting demand for a new generation of products.’’

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