The interest in—and the need for—alternative investments such as opportunities in real estate, private equity, hedge funds and natural resources, continues to grow at a steady pace. And given the current state of the overvalued equity markets and an unsteady bond market, there’s good reason for the uptick in interest.
A recent research study conducted by data analyst firm Preqin, says, “The alternative assets industry is bigger than ever, with more than $7.7 trillion in hedge fund and private capital assets managed globally, having grown by $300 billion during 2016.”
The study also evaluated how institutional investors are allocating funds to alternative investments, and it serves as a good indicator of how alternatives are performing overall.
“Participation in multiple alternative asset classes is now the norm for the majority of institutional investors, with alternatives portfolios becoming more and more diverse,” the report says.
Alternative Investment Study Findings
This graphic from the report ranks how investors are allocating to each alternative asset class, with real estate at the top spot at 61 percent, followed by private equity, hedge funds, natural resources, private debt and infrastructure.
This aligns with what we’ve observed and experienced over the past year. Lower interest rates have made real estate investments very attractive, while selective private equity and hedge fund investments have also provided some potentially high-return opportunities.
This chart shows how institutional investors view the performance of select alternative asset classes, comparing performance expectations from the previous 12 months against performance expectations for the next 12 months.
Based on this study, real estate exceeded expectations over the past 12 months, but is expected to perform less favorably over the next 12 months. That’s possibly due in part to an anticipated rise in interest rates.
Although natural resources underperformed over the past 12 months, the investors polled in the survey expect this asset class to improve over the next year. Hedge funds are also expected to improve. Private equity met expectations over the past 12 months and is expected to perform at the same level during the next year, according to the report.
This graphic illustrates investors’ perception of each alternative asset class. Private equity, private debt and real estate rank high, while natural resources and hedge funds rank lower.
Overall, the report is not overly optimistic about hedge funds because while many investors polled believe the asset class improved last year, it still didn’t meet expectations. We had a similar experience as well.
However, we think if you find the right hedge funds with good fund managers, they can still be a great opportunity for people who want investments that can offer potentially high returns while also introducing assets to their portfolios that don’t correlate with the traditional stock and bond markets.
The final chart that we’ll review illustrates how the institutional investors plan to allocate funds to alternative investments over the long term. It shows a continued negative outlook for hedge funds over the next 12 months and beyond, and investors are also mixed on natural resources, which still haven’t completely rebounded yet from their recent downturn.
The majority of institutional investors plan to increase their allocations fairly substantially for the remaining asset classes over the long term.
You can read about our current outlook on alternative investments by clicking here.
Do you have questions about this study, or about alternative investments in general? We have more than 40 years of experience in this arena, and we would be happy to help you learn more. No strings attached.
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