Trends: AUM of alternative asset managers growing

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 31, 2017 - August 06, 2017.
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The world’s 100 largest alternative asset managers saw their assets under management (AUM) grow 10% to US$4 trillion last year, according to Willis Towers Watson’s Global Alternatives Survey 2017. The total AUM of the 562 alternative asset managers that participated in the survey was almost US$6.5 trillion.

Real estate strategies made up the largest share (35%) of AUM at more than US$1.4 trillion

despite falling returns from the US property market due to expectations of rising interest rates. In Europe and Australia, however, returns remained stable because of low bond yields. Willis Towers Watson says investors should be cautious of higher-risk property strategies in the US and the UK as their real estate cycles are at higher points than the continental European market.

Private equity strategies had the next largest share (18%) of AUM at US$695 billion. Private equity continues to be popular as the returns have been higher than other asset classes. Willis Towers Watson notes that pricing is at its highest since the last financial crisis due to inexpensive debt packages and growing competition from trade buyers.

A new trend emerging from this asset class is the use of subscription line financing to purchase assets over a longer time frame. But the interest expense may accumulate over time and pose a risk if investors are unable to repay the subscription line when called.

In terms of outlook, Willis Towers Watson expects the returns at the upper-end market to fall and for the largest private equity managers to transform into full-fledged asset management firms as more asset managers begin to conduct deals by themselves.

Hedge fund strategies came in third with 17% share of the AUM at US$675 billion, despite its AUM falling 12% on the back of disappointing returns last year. The report says the demand for investments diversified out of traditional equity and credit markets will maintain interest in hedge funds, provided that traditional managers review their solutions and high fees.

“We have seen some withdrawal of capital from hedge funds in the face of high fees, skewed alignment of interests and performance headwinds. It appears that the growing groundswell of negative sentiment that has arisen due to the aforementioned issues is now showing up in the decisions of asset allocators,” says Luba Nikulina, global head of manager research at Willis Towers Watson.

“We are surprised that it has taken this long to observe the trend turn. However, this is aligned with our long-held view that the hedge fund industry needs to change, with those willing to offer greater transparency and display value for money likely to prosper going forward.”

Illiquid credit managers saw the largest increase in AUM growth (51%) to US$360 billion as they continue to ride the rising demand for private debt strategies.

Pension funds are the largest investors of alternative assets, holding 33% of the total AUM. For the top 100 alternative asset managers, pension fund assets amounted to US$1.6 trillion under management, or 51% of their total AUM. Real estate strategies were the most popular in this category, even though illiquid credit allocations doubled to 8% last year.

“Despite the elevated levels of macro and political concerns, long lease property strategies in Europe have continued to see interest from de-risking pension funds, given the expected return differential relative to bonds and higher inflation expectations,” says Nikulina. “We believe this demand is likely to persist as long as bond yields remain low, which makes the ability to source attractive assets in this area ever more important.”

Wealth managers are the next largest group of alternative asset investors, with 15% of the total AUM, followed by sovereign wealth funds (5%). Insurance companies had the most notable increase in AUM growth, from 10% to 12%.

“Although the alternative asset manager universe continues to be dominated by pension fund assets, as solutions have continued to evolve to be better aligned to investor needs and incorporate lower cost structures, we have seen growing interest from other investor groups such as insurers looking to lock in alpha opportunities presented by the continued volatility,” says Nikulina.

By region, North America remains the destination with the largest amount of alternative assets at 54%, followed by Europe (33%) and Asia-Pacific (8%).

Bridgewater Associates is the largest alternative asset manager with more than US$116 billion invested in direct hedge funds. TH Real Estate is the largest global real estate manager. It oversees more than US$105 billion in assets. Blackstone Group has the highest volume of private equity at US$100 billion and funds of hedge fund assets at US$71 billion.

Data for the survey was provided by investment managers and publicly available sources, including the Global Billion Dollar Club, published by Hedge Fund Intelligence.