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The future is ‘Alt-right’… for investments (not Steve Bannon!)

10 November 2020

By Henry Adefope

Alt-right as in…. the future looking bright for Alternative investments, not the Steve Bannon clickbait. In the past these were known as financial assets that didn’t fall into one of the conventional investment categories, like stocks, bonds, and cash. The sort of more interesting, but riskier ‘other’ side of the investment universe that only the world-weary experts (pension funds and HNW investors) could afford to tread because of their complex nature, lack of regulation, and degree of risk. 

But just as eating (Deliveroo), listening to music (Spotify), socializing and communicating (FaceBook/Instagram/Twitter), talking (Voicenote), transmitting (TikTok) [I could go on] …have all had their turn in moving from ‘alternative’ to ‘mainstream’, so to is alternative investing. 

Capital allocations to these investments have been growing in popularity for a while among pension funds and institutional investors, but the perfect storm of an increasing policy shift toward investment sustainability and the Covid-19 pandemic seems to have been the tipping point, which has meant that alternative investments are no longer the exotic addition you bring to a dinner party to show friends how knowledgeable and worldly you are. The term ‘alternative’, already strained to reflect a mix of different strategies, products and firms, has become further flexed. Now they’ve become part and parcel of the product offer of the 21st century asset manager or investor service provider.  

Prequin (big authority in alternatives space) thinks AUM growth in alternative assets will outpace global GDP and inflation by Usain Bolt-type gaps. This is a big deal, that is currently transforming the way the UK asset management sector is organizing itself. 

Two relatively seismic events have taken place within the last decade that hold all the clues, [1] the Covid-19 outbreak, and [2] the emergence of the ETF/liquid alternatives retail boom. They combined to rip down the barriers for the ordinary (rich) man or woman on the street to gain access to these nascent, opaque, costly investments on a much cheaper wholesale level. 

1.      Issues like decarbonization were already pushing asset management to the forefront of social and economic change, likewise, the pandemic has served to accelerate the need for increased and sustainable long-term investment returns – driving alternative, thematic, regenerative real-asset investments to become a mainstream asset class in itself. Alternative assets today incorporate a whole host of ‘other’ investments, that are becoming too mainstream to be known as ‘other’ anymore. Weird and wonderful private and total return funds, sustainable equities, infrastructure, AI, social housing, real estate, bitcoin, robotics, marijuana, even Space, I mean literally almost anything is becoming investable; all driven by bonkers mainstream investor demand (even for just a small percentage of their portfolio). 

2.      The boom in ETF tracker products that can follow thematic trends at a low cost, allowed ordinary investors like me and you, to have regulated access to invest in all sorts of alternative assets. But would we be silly enough to exercise this right and explore all types of new unconventional investment strategies we hardly know a thing about? It is a ‘yes’ from Financial Advisers. Multi-asset continues to be the dominant strategy that they offer their clients. Amid the Covid crises, the share of retail sales from multi-asset and fund of funds topped 60% of Investment Association (IA) retail sales.

The blurring of the lines between alternative and traditional asset management will not have been lost on the best management teams. I don’t foresee an end to the mergers and acquisitions within the sector which will rumble on for good reason as firms’ team up to deliver a broader asset class and product mix and open new distribution channels to an increasingly ‘woke [sophisticated]’ investor. Yes, there will be increasing volumes of partnership between asset managers, wealth managers, private banks and funds-of-funds, all looking for different types of arrangements, joint ventures and sub- advisory relationships. 

Tomorrow, is an uncharted era of:

  • New technologies disrupting existing paradigms; 
  • Demographics reshaping the needs of the world’s population; 
  • Shifting consumer behaviours forcing changes to existing business models;
  • And dramatic changes in our physical environment

The growing universe of alternative and thematic investments are helping fiduciary, asset managers and their clients, navigate an unknown future together. It’s a money spinner. What we do know is that interest rates and growth will continue to be lower for longer. Those brands that offer their clients a route to the alternative investments ‘Wonderland’, at low cost, will sweep up.