Alternative investment allocators likely to increase allocations to less liquid strategies, embrace new managers
A new survey from Seward & Kissel, a law firm specializing in the hedge fund market, finds a continuing robust interest in alternative investments by a diverse group of investors. Access the full report here.
April 07, 2021 — NEW YORK–(BUSINESS WIRE)–While the “fear gauge” that tracks market volatility has remained at elevated levels since the onset of the pandemic, those who allocate alternative investment dollars for large investors are showing no signs of skittishness, according to the Alternative Investment Allocator Survey conducted by leading law firm Seward & Kissel. The survey found that allocators are likely to increase allocations to less liquid strategies and continue to embrace emerging managers in 2021.
The survey analyzes the views of individuals from pension funds, endowments, family offices, seeders, high-net-worth individuals, and others. Asked how their organizations’ allocations across a wide range of alternative investments would change in 2021, on average 42% of participants anticipated their organizations to increase allocations to at least one strategy and 54% said they would maintain their allocations, while just 4% said their allocations would decrease. The strategies for which participants expect to increase allocations to in 2021 were primarily less liquid strategies typically utilized by closed-end funds with private equity, private credit, and venture capital accounting for the top three of the four strategies of interest for increased allocations, followed by equity hedge.
At least 50% of each investor type surveyed also indicated that their organizations currently allocate to emerging managers (those founded less than two years ago). Fund-of-funds and seeders were most open to emerging managers, at 100%, and pensions sat at the low end, at 50%. In another strong sign of industry confidence, nearly 50% of survey participants expected their average allocation size to exceed $25 million.
Seward & Kissel’s first-ever Alternative Investment Allocator Survey analyzes the views of personnel who work at various types of investment allocators, irrespective of location or the amount of investable assets. Based on the number and variety of participants, we believe that the Survey results provide informative benchmarking data that will be useful as the industry emerges from the current environment.
Excerpts From The Survey:
Investors Show Increased Appetite for Less Liquid Strategies
We asked participants whether their organizations would increase, decrease or leave unchanged their allocations to various strategies. On average, the ratio was as follows: 42% would increase to at least one strategy, 4% would decrease, and 54% would stay the same. The strategies for which participants expect to increase allocations to in 2021 were primarily less-liquid strategies with private equity, private credit, and venture capital accounting for the top three of the four strategies where participants expect their organizations to increase allocations, followed by equity hedge.
The strategies with the highest percentage of participants anticipating a decreased allocation (about 8% of respondents) were quantitative and credit/fixed income. In addition, over 60% of participants indicated that their organizations do not allocate to cryptocurrency or futures strategies, while over 40% also indicated their organizations do not allocate to quantitative, macro or infrastructure strategies.
When evaluating the relationship between specific strategies and those investor groups seeking to increase allocations in 2021 to those strategies, trends began to emerge:
- For private debt strategies, participants from endowments, foundations and non-profits, HNW/family offices and investment consultants expect to increase their allocation
- For private equity strategies, participants from fund-of-funds and investment consultants expect to increase their allocation
- For venture capital strategies, participants from HNW/family offices and fund-of-funds expect to increase their allocation
- For equity hedge strategies, participants from HNW/family offices, funds-of-funds and investment consultants expect to increase their allocation
How Investors Allocate
Of the different ways that allocators make allocations, direct fund investments are the most popular across all investor groups (86%) followed by separately managed accounts (SMAs) (30%) and co-investments (28%). At the investor group level, a disproportionate percentage of participants from HNW/family offices indicated that their organizations will also utilize SMAs (50%) and co-investment vehicles (37.5%) while corporate and government pensions regularly invest through co investment vehicles (75%).
Other Key Findings Include:
- Of the different ways that allocators invest, direct fund investments were the most popular across all investor groups, with 86% of respondents using them, followed by separately managed accounts at 30%, and co-investments at 28%.
- Over 60% of participants indicated that their firms do not currently allocate to cryptocurrency or futures strategies, while over 40% also indicated they do not have allocations to quantitative, macro, or infrastructure strategies.
- Asked to identify their organizations’ most important consideration in making allocations, respondents cited investment strategy/process most frequently (86%), followed by manager’s track record (55%), and pedigree (53%).
- About three-quarters of respondents cited favorable fees as the most sought-after term when negotiating side letters, well more than any other request.
Commentary
Seward & Kissel Investment Management Group partner Steve Nadel, the lead author of Seward & Kissel’s 2021 Alternative Investment Allocator Survey:
“Our inaugural survey shows the continuing robust interest in alternative investments by a diverse group of investors.”
“The expressed interest in emerging managers appears to signal that the world has changed significantly since the pandemic, in terms of alternative investment marketing. It is now much easier for newer managers to somewhat level the playing field by getting their message out through Zoom and other video conferencing tools. And, more importantly, many allocators appear to be getting comfortable with this form of communication.”
“Of the 11 investment strategies we polled about, five of the top six where allocators indicated an expected allocation increase in 2021 were less liquid, closed-end strategies.”
About Seward & Kissel LLP
Seward & Kissel LLP, founded in 1890, is a leading U.S. law firm with an international reputation for excellence. The firm is particularly well known for its hedge fund and investment management work, having established the first hedge fund ever, A.W. Jones, in 1949, and having earned numerous best in class awards over the years. In addition, Preqin recently identified Seward & Kissel as the top U.S. law firm based on number of hedge funds serviced.
