Print this article

Demand For "Liquid Alternatives" Continues To Grow Globally - Deutsche Bank

Tom Burroughes

11 September 2014

There has been a sharp rise in the number of investors surveyed by who want to put money into liquid alternative investments such as certain breeds of hedge funds, showing that a desire to hit the exits quickly remains a key selling point.

Six years on from the credit crunch, when hedge funds and property funds slammed their doors on investors trying to redeem assets in the ensuing panic, the memories of that period continue to put a premium on vehicles that offer as much liquidity as possible, such as listed funds. A conundrum for some strategies, however, is that they are by nature illiquid and have investment time horizons lasting months or longer, so to offer same-day liquidity, for example, is impossible. However, some funds that adopt intra-day trading strategies can offer comparable levels of liquidity; there are also “synthetic” hedge fund-style vehicles offering high liquidity. With some "alternatives" such as commodities and gold, liquidity has always been relatively high.

The survey by the German bank was conducted among 212 investor entities worldwide managing more than $804 billion in hedge fund assets, and 86 global hedge fund managers representing $6 trillion in firm-wide assets.

The share of investors investing into liquid alternative products is now at 51 per cent from 28 per cent from a year earlier. The study - From Alternatives to Mainstream (Part Two) – saw almost three quarters of alternative UCITS investors and nearly two thirds of investors into alternative ‘40 Act mutual funds planning to increase their allocations.

Other recent studies have backed up the popularity of UCITS structures – pan-European funds offering high liquidity and investor disclosure – for alternative asset classes. In late August, Preqin, the research firm, said that in the 12 months to June 2014, 61 per cent and 50 per cent of firms that manage alternative UCITS and alternative mutual fund products respectively reported net inflows to these vehicles. No managers reported outflows from these vehicles.

Liquid alternative investments are now the fastest growing part of the asset management industry. Alternative UCITS assets have grown over 40 per cent annually since 2008, whilst the hedge fund industry has grown 13 per cent and the wider European UCITS industry only 2 per cent. Alternative mutual funds have grown by 38 per cent annually during this period, compared to 9 per cent for US mutual fund industry.

While UCITS are a European invention, the idea of a fund structure that enables hedge fund-type investments to be held in a way offering same-day liquidity is popular in a number of other regions. Recently, for example, this publication was told that Asian clients like to hold exchange traded funds inside UCITS-structures.

Widening choices
In response to investor demand, hedge fund managers are quick to diversify their product offering, with 42 per cent of responding managers currently offering liquid alternative products, up from 27 per cent last year, the report found. A further 34 per cent would consider including such products. One quarter of managers plan to launch at least one alternative UCITS product in the coming year, and 29 per cent have similar plans for alternative ’40 Act mutual funds.

The move towards liquid alternatives has been most pronounced among large, well established managers, with more than two thirds with $5 billion or more in assets under management running such products for more than three years. A third of these managers plan to launch at least one new liquid alternative product in the next 12 months.