Tuesday, January 31, 2023

Allocator trends that shaped 2022

Allocators up privates exposure but debate rages

The debate over private markets has escalated this year, with AQR’s Cliff Asness accusing the sector of “volatility laundering” and Ruchir Sharma, the chair of Rockefeller International, saying this week they offered an “an escape from reality.”

But allocators continue to put more money to work in the space, with private equity drawing higher portions of capital from the Adia sovereign wealth fund of Abu Dhabi.

The $829bn pool, which stayed constant on hedge funds, was far from alone in 2022. And it was not just private equity drawing more capital, with everything from private credit to infrastructure proving popular.

Flows data varies across providers and sectors but the sentiment on privates remains cautiously positive.

Harvard Management Company summed up the challenge facing privates next year after seeing its highest risk asset classes  (private holdings in PE, real estate and venture) outperform.

“Private managers have not yet marked their portfolios to reflect general market conditions. This phenomenon does make us cautious about forward-looking returns in private portfolios.”

Read more: Private equity mandates defy cautious mood

Multi-strategy tops HF investor wishlists

In vogue since the pandemic, more stellar performance from the likes of Citadel, Millennium and ExodusPoint has underlined the appeal of multi-strategy behemoths.

Allocators are drawn to the strong returns, low volatility and diversification they offer, despite a shift in the sector towards higher fees through the use of pass-throughs and longer lock-ups. In the face of this, single manager hedge funds face a more difficult fundraising and recruitment environment.

Investors put a net $23.2bn into such funds last year and $13.7bn in the first ten months, according to eVestment. In such an uncertain and often febrile market environment, the typical multi-strategy offer of low-net and high gross exposures is proving a potent mix.

But questions over risk management and fees will likely increase in 2023.

Read more: March of the multi-strats – are they unstoppable?


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War in Ukraine reshapes global industry

Russia’s invasion of Ukraine had a huge impact in 2022, with few countries or markets immune from its far-reaching consequences.

War on the edge of Europe made the fundraising environment much harder for firms based in the region. Investor relations executives in London found allocators in the US and elsewhere more resistant to allocating until the conflict and associated volatility in the region’s energy markets and politics cooled.

The US industry, home to most of the multi-strat titans, continued to be the alternative investment industry’s engine of growth, both in terms of allocations and strategy innovation. But the main geographic trend of 2022 was the rise of hubs in the Gulf, boosted by rising oil prices and home to increasing numbers of the world’s wealthy.

Singapore also continued to grow at the expense of Hong Kong.

Read more: Dubai lures hedge funds / How Adia is investing in alternatives / Singapore spars with Dubai as funds look east

The end of 60:40?

Investors allocated to diversifiers like trend-following will be relieved after a historically bad year for the typical 60:40 portfolio of stocks and bonds. The coordinated sell-offs this year were especially brutal for investors that had removed alternative exposure after years of easy gains by passive vehicles.

Allocators and managers largely agree that time is gone and the age of active management beckons. Elevated volatility looks set to stay and diversification is the watchword among investors.

KKR is now arguing that investors adopt a typical 40% stock, 30% bond and 30% alternative allocation going forward, with at least 10% in private credit.

Read more: Man Group results distil value of alternatives in year of chaos