Are market conditions impacting investor allocations to alternatives?

While 26 per cent of investors haven’t allocated to any alternatives yet, 18 per cent have made a foray into just one asset class. Fewer have invested in more than one, while just nine per cent are invested in six different alternatives. Real estate leads with the highest average target allocation among those that invest in it, at 10.2 per cent. Infrastructure has the lowest target at just 5.5 per cent.

As for different motivations to invest in alternatives, diversification was a popular reason where all alternative asset classes were concerned. Notably, private equity stood out as being more often sought after for its high absolute return potential than other asset classes.

The majority (64 per cent) of investors noted they believe equity markets are at their peak. And while the most (64 per cent) said the current equity market environment isn’t prompting any change in their private capital allocations, more (26 per cent) said it’s prompting them to allocate more than (10 per cent) said it’s prompting them to allocate less. As for hedge funds, 54 per cent said the current market is not impacting their positioning, 40 per cent said they are positioning more defensively, while just six per cent said they’re being more aggressive.

“This is a pivotal moment for the hedge fund industry, as investors initiate a sea-change in their allocation patterns,” said Amy Bensted, head of hedge funds at Preqin, in a press release. “After several years in which hedge fund returns have failed to keep pace with the historic equity bull market, investors felt they could be getting higher returns at a lower cost. But the industry’s capital protection and risk mitigation advantages are coming more to the forefront of investors’ minds. This is why the industry has the brightest outlook from investors in five years, despite the challenges it faced in 2018. This does come with a caveat, though – investors are looking to rebalance their holdings, and many are trimming the number of managers and funds that they invest in as they seek to create more concentrated portfolios. Fund managers may be optimistic about their longer term relationship with investors, but they will need to work hard in the coming months to effectively attract and retain capital.”

Hedge funds were the asset class where the most (21 per cent) investors said they’re planning to decrease their allocations in the long-term, followed by natural resources (12 per cent) and real estate (nine per cent). As for increases, 50 per cent said they intend to allocate more to infrastructure, 48 per cent to private debt and 46 per cent to private equity.