Hedge funds may be capturing the media’s attention – but the real news is in alternative strategies. Interest rates, a broadening investor base, and increased access to alternative strategies among RIAs are some of the factors driving growth in industry AUM. Prime Services’ Aaron Steinberg takes us beyond the hedge fund headlines.
It’s all over the Internet – in the apps on your phone, across social media, and even in online publications – headlines designed to attract attention and get you to click a link. When it comes to the financial industry, one of the biggest headlines driving those clicks has been around the varied success of hedge funds. But let’s take a look beyond the headlines.
According to industry sources, hedge fund AUM is at $3 trillion in the first quarter of 2019, up from $2.8 trillion in the fourth quarter of 2018. That’s an increase of more than 4%.
So what’s driving these inflows? Let’s start with interest rates. Not only have they stayed stagnant, but strong indications are that they will remain low for some time. Large institutions with liabilities who often rely, in some regard, on interest rates to meet their return hurdles need to figure out a way to fund their future obligations. The outsized return profile, or alpha generation, of many alternative strategies can help fill that gap for these institutions, thereby causing them to increase their allocation to alts.
What else is causing the increase in assets in the alternatives industry? The broadening investor base. More and more, registered investment advisors are starting to allocate to alternatives or increasing current allocations to these strategies. Although the broad-based market has been moving upward for some time now, alternative strategies provide downside protection, diversification, and additional alpha generation – core staples to any well-rounded portfolio.
The third piece is access. With the advent of liquid alternatives and increased demand for alternative strategies from registered investment advisors and other retail investors, many new investors who have not previously been able to access these strategies are now able to access them. Whether it’s through liquid products, separately managed accounts, platforms, or other innovative structures, the accessibility of alternative products is greater than it’s ever been.
Additionally, as the broader investor base becomes more educated on the benefits of alternatives, the comfort level, desire, and ability to invest continues to increase.
So the next time a sensational headline is going to rope you in, remember: alternative strategies – the products which hedge funds produce – are relied on by many, if not all, institutional investors and increasingly by a broader investing public as products become more available and investors become more educated. The result is continued growth of the AUM in the alternative industry.
Contact the Prime Services team at Pershing for more insights into the alternatives industry and how we work with hedge funds to solve for their business challenges.
Aaron Steinberg is a director of sales and relationship management in the prime services division of BNY Mellon's Pershing, focused on financing and securities lending solutions for hedge funds, mutual funds and other alternative asset managers. He has almost 20 years of experience working with alternative investment managers.