Alternatives allocations entering new stage of growth

Asset owners in Asia have made big strides in allocating to alternatives in the last few years, according to a recent forum.

Since the global financial crisis there have been large increases in the proportion of assets allocated to alternatives in investors’ portfolios, in some cases a five-fold rise.

However, panellists at the forum warned that the explosive alternatives growth may be coming to an end and entering a more nuanced phase of development.

At AsianInvestor's 10th Asian Investment Summit (AIS) in Hong Kong last month, a quarter of the audience at a session on alternative investments selected ‘yes, substantially’ (defined as a more than 100% increase) when polled on their firm’s allocations to alternative investments over the last ten years.

Following the rapid increase seen over the past decade, from an average allocation of 5% to close to 25% for pension funds globally, Jayne Bok, head of sovereign advisory at Towers Watson, said she expected a gradual slowdown in the pace at which allocations to alternatives increase.

Other panellists at the AIS suggested there were structural reasons why the take-up of alternatives has not been even stronger. Jo Murphy, Asia managing director of the Chartered Alternative Investment Analyst Association (CAIA) suggested that allocators “are still not remunerated in a way that makes it a compelling thing to do.” Career risk, a common problem amongst investing institutions, holds back original thought, which was a point echoed in other sessions. If investment boards and portfolios managers are not given a clear remit and incentive to look outside traditional assets, said panellists, things will not change.

The first wave of allocation to alternative investments by institutional investors was aimed at “getting away from home bias,” said Bok, with the second wave aimed at “moving away from traditional assets”.

The third wave is “going to be a bit more nuanced,” predicted Bok. “I see it as a portfolio construction story,” she explained, as “people are starting to think outside of pure asset classes and geographies”.

Murphy added: “Investors are looking at everything available rather than separate buckets. They are looking more holistically at the investment universe”.

Four-fifths of audience members at the forum session said that they plan to increase allocations to alternative investments over the next five years: with 56% selecting ‘yes, moderately’ (defined as less than a 50% increase over the next five years) and 24% selecting ‘yes, substantially’ (defined as a more than 50% increase over the next five years). A quarter of the audience said that they had never allocated to alternatives.

Bok observed that when she started working at Towers Watson in 2000, all overseas allocations were limited to equity and bonds. “After 2006, and ever since the global financial crisis, 80-90% of my projects and manager selections have been alternatives-based."

As allocations to alternatives have risen, institutional investors have moved away from absolute to relative benchmarks for alternatives as they have sought to compare public and private equity, for example, explained Bok. “There’s probably more of a leaning towards relative benchmarks" among the top 20 Asian sovereign wealth funds, said Bok. “There is more of a qualitative consideration when looking at performance than with a liquid-only programme,” she added.

Panel member Andrea Luzzi, chief risk and compliance officer at $700 million fund of hedge funds Ayaltis, said that benchmarks were not of primary importance.

"We don't look at benchmarks when evaluating the risk of investments," Luzzi said. "The real risk is the amount that you can lose and the likelihood of loss, the rest is something that is good for regulators but not for us."

Just under a quarter (23.8%) of audience members said that they benchmark relative performance for both traditional and alternative investments while 28.6% said that they benchmark absolute performance for alternative investments and relative performance for traditional investments. A total of 28.6% said that they benchmark absolute performance for both traditional and alternative investments.