As alternative investments become ubiquitous among institutional portfolios, harnessing the right strategies will make all the difference in an environment where returns are proving harder to find, said John Gray, partner, Adams Street Partners at an event hosted by CI Institutional Asset Management on Wednesday.
Private equity
“In a world where everybody needs return . . . people are ramping up their allocations to private equity,” he said.
Funds of funds are becoming a popular vehicle to harness the benefits of venture capital, he said, noting generally funds of funds are an effective way to isolate a target exposure for an investor within the broader private equity world, he added.
“You can specialize the mandate for someone with something specific, a target they’re looking for,” he said. A fund of funds would work especially well if a client were seeking exposure to early-stage venture capital projects, since they are higher risk and the vehicle provides added diversification, he added.
Real estate
In balancing the need to implement more aggressive return-seeking strategies in a lower return environment, owning real estate allows for solid income that can support other investment activities an institution might feel the need to take on, said Bob Perry, managing director, CBRE Global Investment Partners.
Among real estate, winning cities are a particular focus, he said.
“We were having a conversation about how vibrant Charlotte [N.C.] is, for example, and how non-vibrant parts of upstate New York might be today. That’s this ‘winning cities’ concept. We’re looking for places that have in-migration, population development, business formation, a sound economic tax structure, educational system and so forth. It brings dynamism, it brings people, it brings consumer spending. Those are targets for us.”
Perry also highlighted other themes including the changing nature of work and the resulting demand for flexible office spaces, the shift in demand for larger retail spaces to larger industrial spaces to accommodate the trend towards online shopping and resilient retail locations, especially those with an experiential component.
Hedge funds
Jay Raffaldini, managing director and head of product specialists for UBS Hedge Fund Solutions, dug into hedge fund strategies.
“There will be a period of time when both the bonds and equities have negative returns, not just in real rates but absolute rates,” said Raffaldini. “And the last time that this happened on a sustained basis was in the mid-1970s, which is when hedge funds were born.”
There are really 10 to 15 different hedge fund styles for making money, he said, adding while in a certain period, some hedge fund strategies can seriously underperform while others outperform significantly.
Often if a strategy is quite popular and successful for one or two years, it drops to the bottom rung shortly thereafter, he said. “Every strategy earns a risk premium or a rate of return for compensation to that asset class. And what do investors do? They chase performance, globally. So as more and more money goes into the opportunity set, returns get diminished and as returns get weak, money flows out. So the way to invest all your portfolios, not just the alternatives, is to be countercyclical.”
Infrastructure
Indeed, infrastructure is one asset class where the effects of that cyclicality are evident, with certain subsets becoming overcrowded in today’s market, according to Dan Kim, director of the global relationship group, IFM Investors.
Toll roads and ports are still presenting decent buying opportunities, he said, noting there is such demand in energy and water utilities opportunities that entry-point prices are at an all-time high, making his firm more inclined to sell than buy at these levels.