Monday, 27 February 2017
Last updated 6 sec ago
Jan 13 2017 | 8:22pm ET
By: Sang H. Lee, Founder & CEO, DarcMatter
Currently a $7 trillion industry, we believe alternative investments are poised for continued growth in 2017. Here are the top five trends we expect for the alternative investment industry this year
1. An Increase In Market Volatility Will Help Alternatives Investments Stand Out
Alternative investments are favored for their lower correlation to traditional assets and their ability to enable investors to mitigate the effects of market volatility. Amidst predictions that 2017 will give way to a volatile market, it will be imperative for investors to consider portfolio diversification strategies. Various events will shake up market volatility on a global scale, such as the effects of Brexit, uncertainties about Trump’s administration policies, and other global macro events happening abroad in Asia and Latin America.
With market volatility expected to rise in 2017, alternative investments will be a critical option for investors concerned about diversifying risk exposure and dampening volatility.
2. The Strong U.S. Dollar Will Have Offshore Investors Increasingly Favoring U.S. Fund Managers
U.S. fund managers incur significant expenses when marketing abroad and navigating foreign regulatory frameworks. As such, global marketing efforts are typically within the exclusive domain of larger fund managers. For instance, U.S. managers interested in marketing to European LP’s would have to register with the AIFMD regulatory landscape. The U.S. market will still be the primary focus for small to medium managers in the U.S. when it comes to capital raising and marketing. However, with the U.S. dollar predicted to be strong in 2017, many offshore investors will look towards allocating to U.S. dollar denominated investments.
This would certainly work to the benefit of U.S. managers. One particular geography DarcMatter is focusing on is Asia, where the company has been creating partnerships and working with family offices, wealth managers, and institutional investors in Hong Kong, mainland China, and South Korea who are increasingly looking to allocate to U.S. alternative investment managers at this moment. This is very attractive to U.S. fund managers, who actively use the platform to raise capital cost-effectively abroad.
3. Despite Headlines, Capital Will Still Pour into Hedge Funds (and Alternative Investments in General)
2016 was a tough year for hedge funds in terms of media coverage, with attention-grabbing headlines focusing on large institutional investors stepping away from the space. For instance, NYCERS (New York City Employee Retirement System) voted to liquidate its $1.45 billion hedge fund holdings, AIG stated it would halve its $11 billion investment in hedge funds by the end of 2017, and MetLife announced it would reduce its $1.8 billion exposure by two-thirds. These headlines indicate an exodus of capital from hedge funds, but like the adage goes, we can’t always believe what we read.
Despite departures from some large U.S. institutional investors, the actual invested capital in hedge funds has only shrunk by a small percentage. In 2016, more institutions have allocated upwards of $1 billion into hedge funds than ever before. As the below graph from Reuters indicates, U.S. pension funds are increasingly drawn to hedge funds.
Facing lackluster performance and pressures to lower fees, larger hedge funds will continue to face some difficulty in 2017. The silver lining here is that small and mid-sized fund managers will have the opportunity to shine. Small and mid-sized hedge fund managers are thought to be more nimble in making investment decisions. As investors continue to get more sophisticated and are pressured to enhance returns, they will certainly turn to smaller managers as an option.
4. Financial Advisors and HNWIs are Still A Relatively New Source of Capital, But Remain Important
Institutional investors have largely dominated the alternative investment space for a long time, due to high minimum investment requirements and the perception that alternative investments were only meant for the most sophisticated investors. However, alternative investments will become more sought after as financial advisors and HNWIs increasingly search for new ways to diversify their portfolios. While financial advisors and HNWIs were previously unable to participate in alternative investments due to high requirements and a lack of deal flow, 2017 is expected to provide more feeder fund structures (which decreases minimum investment requirements) and technology-enabled access for these investors. While the check sizes coming from financial advisors and HNWIs may be smaller than those of institutional investors, fund managers should not ignore this significant source of capital.
5. Technology Will Continue to Disrupt the Industry and Play a Larger Role in the Capital Raising Process
Fintech was a big buzzword in the financial services industry in 2016, and we expect this to continue in 2017 as technology continues to bring more efficiency and transparency to the alternative investment industry. Traditionally, fund managers have depended on close personal relationships, cap-intro conferences, and outsourced marketing firms to market their fund and raise capital. In 2017 we’ll see a lot more fund managers adopting and integrating technology platforms as part of their marketing strategy to reach and communicate with both existing and new investors. The funds with the most successful raises will be those that actively integrate technology platforms while leveraging their personal contacts simultaneously.
The use of technology platforms such as DarcMatter will benefit the alternative industry as a whole. Fund managers will be able to efficiently increase their exposure to prospective investors, while optimizing the amount of time they spend with investors. Technology platforms will also bring further transparency, efficiency, and access for investors who are searching for potential alternative investment opportunities.
Founded in 2014 and based in New York, DarcMatter is a global platform for alternative investments that uses technology to efficiently connect accredited investors, advisors, and asset managers with institutional-quality alternative investment funds.