Institutional investors managing trillions of dollars are seeing the potential benefits of alternative investments and more than half of those surveyed are planning to increase their allocations into the products, according to a white paper by Clearwater Analytics.
Diversification is one of the top reasons institutional managers are gravitating toward alternatives, said Jonathan Flitt, Clearwater's global head of alternative investment solutions.
Given that the number of public companies has been decreasing since 2012, investors have had to turn more toward alternatives to provide a counterbalance as the traditional 60/40 allocation is becoming less popular among advisors, he said.
A second reason is that long-term horizons give alternatives the ability to hold up through turbulent times compared to traditional investments, he said. Alt investments are not subject to forced liquidations like those that caused the downfalls of Silicone Valley and First Republic Banks, Flitt added.
“They can weather the volatility,” he said. “Alternatives tend to have a longer time horizon.”
Also, alternatives offer high returns on a risk-adjusted basis over multiple cycles, which is particularly relevant to those looking to invest in private debt, Flitt explained.
“Private debt offers floating interest rates which fluctuate based on market conditions such as interest rate changes,” he said. “As investors seek higher yields in this higher-for-longer interest rate cycle, private debt provides risk-adjusted returns.”
Clearwater says it surveyed more than 230 executives who collectively manage more than $10 trillion in assets and found that 55% of those surveyed said they will increase their investments in alternatives over the next five years, with 35% saying the primary reason was due to current market conditions.
Participants included officials from multiple sectors, including insurance, wealth and asset management, corporate and government entities, pensions, and endowments, Clearwater said.
Even though there is a push on the institutional side to increase alternative allocations, there are some hurdles still holding advisors back, the white paper stated. Thirty-four percent of the surveyed executives said the biggest obstacle is the regulatory complexities associated with the products.
In addition, 24% cited operational burdens and lack of expertise, while 15% said limited access to quality opportunities is preventing them from investing in alternatives more.
To alleviate those burdens, advisors can embrace the technological advancements and tools available to them, Flitt said. Those tools help advisors handle fluctuating and inconsistent regulations as well as other operational problems.
“For us, we think technology is an important catalyst in making it easier to adhere to regulations to make the journey to investing,” he said.
Participants in the report agreed that there are several operational improvements the alternative space should make so advisors have an easier experience when accessing the space.
Twenty-eight percent said data standardization needs the most improvement, 19% cited management/client reporting and integration with service providers, and 16% said alt investments need better regulatory reporting.
“I think advisors should look to make sure they are embracing the asset class and that they work with partners that can give them access to data that is complete, timely, and accurate,” Flitt said.