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Investors Considering Alternative Investments Amid Market Volatility

Recent market volatility and doubts about how long the bull market will last have increased demand for alternative investments strategies, according to a recent survey of institutional investors.

Based on responses from more than 400 institutional investors and family offices, the latest Context Allocator Trends Report reveals that 70% of respondents plan to increase their allocations to alternatives in 2018, while 29% plan to maintain their current allocations.

This finding was largely driven by 69% of survey respondents who predict that traditional equities and fixed income markets will underperform in 2018 compared to 2017, suggesting that the market cycle may be coming to an end, the report notes. To prepare for a potential downturn, nearly 60% of investors apparently are taking steps to reduce or hedge directional market exposure in equity or credit markets.

Meanwhile, opinions regarding allocations to less liquid strategies was split, with 53% of respondents saying they will employ less liquid strategies in 2018, while 47% will not. Yet, allocators also seemed willing to change their less liquid allocations, with co-investment (20%) and private credit (18%) cited as the two sectors expecting to experience the largest shift in allocations, Context noted.

The report further notes that high-tech strategies, such as quantitative and algorithmic smart beta have also taken hold, with 30% of respondents saying they had replaced some of their hedge fund exposure with one of these strategies.

“This survey was conducted immediately prior to a 10% drop in equities prices and a spike in market volatility, so it’s prescient that many institutional allocators were already planning significant allocations to alternative investment strategies,” notes Ron Biscardi, co-founder and CEO of Context Capital Partners, an alternative investment specialist firm. Biscardi says he believes “demand for alternatives will continue as market participants adjust to the uncertainty ahead.”

ESG on the Move

Investors looking for strategies that offer the potential for a differentiated return stream apparently are also increasingly turning to ESG strategies, the report notes.

While most allocators (63%) do not yet view ESG factors as a significant part of their overall investment philosophy, slightly more than half of those polled (51%) believe they will increase their allocations towards ESG or impact-related funds in 2018.

The report further observes that increased demand for ESG products, especially among younger investors was “well-documented in 2017” and is likely to carry over into 2018.

Crypto Skepticism

Not surprisingly, skepticism surrounding the long-term investment merits of cryptocurrencies remains. According to the findings, just 11% are looking to add cryptocurrencies to their investment portfolios, while 71% of allocators have no plans to invest in crypto-related funds and 18% are still undecided. At the same time, many remain perplexed about the viability of crypto as an asset class, with 27% calling it a fraud, 27% calling it legitimate and the remaining 47% saying they “don't know.”

The annual allocator survey was conducted at Context Summits Miami 2018 from Jan. 31-Feb. 2. Data is based on responses from more than 400 institutional allocators, including family offices, funds of funds, investment consultants, foundations and endowments, sovereign wealth funds and pension funds.

What’s Your Take?

Some reports suggest that DC plans may want to consider incorporating alternative investment strategies into their investment lineup, perhaps as a stand-alone option with a cap on the percentage allocation or as part of a multi-asset strategy, such as through target date funds or other multi-asset funds. We’d like to hear your thoughts on this. Do you believe alternative investments – such as commodities, real estate, hedge funds and private equity – are viable in a DC plan environment? Share your take in the comment box below.