2012 Alternative Investment Survey of U.S. Institutions...
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Morningstar and Barron‘s 2012 Alternative Investment Survey of U.S. Institutions and Financial Advisors June 2013
Transcript of 2012 Alternative Investment Survey of U.S. Institutions...
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Morningstar and Barron‘s
2012 Alternative Investment Survey of U.S. Institutions and Financial Advisors
June 2013
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3Survey aims to capture trends in alternative investing among institutions and advisors.
37th annual nationwide survey, conducted in March 2013.
3235 institutional investors and 471 advisors participated.
3Institutional survey included 20 questions; advisor survey had 26.
3Five free-response questions tackling new topics like hedge fund gates,managed futures fees, and active ETFs.
2012 Survey Overview
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Investor interest is turning to alternative mutual funds and away from hedge funds.
3Mutual funds are becoming the dominant vehicle used by both advisors and institutions to access the majority of alternative strategies. Alternative mutual funds saw inflows of $19.7 billion in 2012, while Morningstar esti mates that among funds in its database, $7.6 billion flowed out of single- strategy hedge funds.
3While 61% of institutions said they accessed long-short strategies via hedge funds in 2010, only 26% indicated that they used hedge funds for that strategy this year. In contrast, more than 45% of institutions said they access long-short strategies via mutual funds versus 38 in 2010.
Key Takeaways
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Institutions and advisors continue to see value in alternatives.
3Among institutions, the number of “heavy users” of alternatives seems to be growing. More than 20% of institutions, compared with 17% last year, said they expect alternative investments to make up more than 40% of holdings over the next five years.
3Only 4% of advisors said their typical client had no money in alternative investments, down from 17 percent in the 2008 survey.
Key Takeaways (continued)
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Institutions maintain interest in equity long-short strategies, while advisors search for yield.
3In 2012, the long-short equity and nontraditional bond categories saw the largest alternative mutual fund flows of $6.1 billion and $5.9 billion, respectively.
3For the second year in a row, institutions again flagged long-short equity strategies as their top choice for increased allocation—the strategy ranked second for advisors.
3Advisors also expressed particular interest in yield-producing alternatives. They cited private real estate as their top strategy for planned future investment. In addition, advisors indicated that master limited partnerships (MLPs) drove significant portfolio growth over the last five years.
Key Takeaways (continued)
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3Advisors shied away from managed futures in 2012 after citing them as their top pick in the two previous surveys. Performance may have been a factor as managed futures ETFs and mutual funds lost 15.6% and 7.4%, respectively, in 2012, similar to their losses in 2011. Institutions and advisors also ex- pressed distaste for the undisclosed performance fees managed futures funds frequently charge.
Key Takeaways (continued)
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Diversification is still driving alternative investments, but high fees are now the primary concern.
3High fees have overtaken liquidity and transparency as the primary reasons why advisors and institutions may choose to forego alternative investments.
Key Takeaways (continued)
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3Alternative Mutual Fund and ETF Growth
3Institutional and Advisor Survey Participantion
3Defining Alternative Investment Strategies
3Past Growth and Future Growth
3Alternative Investment Drivers and Disincentives
3Hot Topics in 2012: Hedge fund Gates, Managed-Futures Performance Fees, Managed-Futures Expense Ratios, Active ETFs, and Hedge Fund Replication
Main Topics
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Alternative Mutual Fund and ETF Growth
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3All seven Morningstar alternative mutual fund categories have seen tremendous inflows over the past five years.
3Nontraditional bond mutual funds have gathered the most assets, but long-short equity and multi-alternative strategies are also gaining steam.
3The managed futures and multialternative mutual fund categories jumped in terms of new launches in 2012, adding 22 and 17 new funds, respectively.
3Alternative ETFs have received net inflows of $41 billion since 2010.
3Commodities are the most popular alternative ETF categories.
3Over the last several years, the “Trading” ETF categories have seen the most launches. These categories saw outflows in 2012.
Alternative Mutual Fund and ETF Growth
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Alternative Mutual Fund Flows
Nontraditional Bond Market Neutral Long/Short Equity Bear Market Multialternative Managed Futures Currency
2008 2010 2011 201220092007
$50,000,000,000
0
–10,000,000,000
40,000,000,000
30,000,000,000
20,000,000,000
10,000,000,000
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Total Net Assets in Alternative Mutual Funds
2008 2010 2011 201220092007
$160,000,000,000
140,000,000,000
120,000,000,000
100,000,000,000
80,000,000,000
60,000,000,000
40,000,000,000
20,000,000,000
0
Nontraditional Bond Market Neutral Long/Short Equity Bear Market Multialternative Managed Futures Currency
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Alternative ETF Flows
2008 2010 2011 201220092007
$50,000,000,000
0
–10,000,000,000
40,000,000,000
30,000,000,000
20,000,000,000
10,000,000,000
Volatility Multialternative Managed Futures Currency Bear Market Trading Market Neutral Long/Short Equity Commodities
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Total Alternative ETF Assets
2008 2010 2011 201220092007
$160,000,000,000
140,000,000,000
120,000,000,000
100,000,000,000
80,000,000,000
60,000,000,000
40,000,000,000
20,000,000,000
0
Volatility Multialternative Managed Futures Currency Bear Market Trading Market Neutral Long/Short Equity Commodities
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Alternative Mutual Fund Launches by Category
2010 2011 2012200920082007
80
0 6 1 12 13 7 Nontraditional Bond
7 13 12 9 24 17 Multialternative
0 1 3 7 9 6 Market Neutral
1 1 5 6 13 22 Managed Futures
4 7 6 16 17 15 Long/Short Equity
1 2 2 3 3 2 Currency
2 1 0 1 0 1 Bear Market
0
60
40
20
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ETF Launches by Category
2010 2011 2012200920082007
120
0 0 2 9 19 0 Volatility
49 49 30 58 47 21 Trading
0 0 3 1 2 0 Multialternative
0 0 2 2 8 2 Market Neutral
0 0 1 0 1 0 Managed Futures
2 0 1 2 8 2 Long/Short Equity
5 13 1 1 1 0 Currency
22 29 4 7 28 10 Commodities
0 0 0 0 1 0 Bear Market
0
100
80
60
40
20
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2012 Survey Participation
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Institutional Investor 2012 Survey Participation: 235 Responses
Respondents %
Bank 11.1Endowment 3.8Foundation 3.8Insurance Company 2.6Investment Company 41.0Private Pension Plan 5.6Public Pension Plan 7.3Other 24.8
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Institutional Investors‘ AUM by Year
>$30 billion
$16–$29.9 billion
$11–$15.9 billion
$1–$10.9 billion
<$1 billion
2012 252011 252010 222009 30
5653
5422
24313618
41343646
%
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Advisor Investor 2012 Survey Participation: 271 Responses
Respondents %
Broker/DealerWirehouse 2.8Regional 3.2Independent 19.4Insurance 2.6Bank 2.8
Financial Planner 13.6
RIA—SEC Registered 29.9RIA—State Level 22.0
Other 3.8
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Advisors‘ AUM Compared to Previous Years
$500M or more
$100M–$499M
$51M–$99M
<$50M
2012 1520112010 2009
111111
26303126
21232022
37363841
%
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Advisors 2012: Most Serving 100 or More Clients
Respondents %
20 or fewer 1021–99 34100–199 26200 or more 30
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Defining Alternative Strategies—2012
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Institutions: What are Alternative Investment Strategies? Top 12, ranked by 2012 % agreement
% Agreement % Agreement
Collectibles (including art)
Distressed securities
Infrastructure
Private debt
Commodities (physical)
Commodity futures
Long/short (equity or debt)
Private real estate (direct or nonlisted REIT)
Managed futures (CTAs)
Volatility/option strategies
Private equity/venture capital
Arbitrage/market neutral
908987
817679
807357
807565
655957
647070
736670
828685
585570
858479
838172
908485
201220112010
201220112010
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Institutions: What are Alternative Investment Strategies? Bottom 12, ranked by 2012 % agreement
% Agreement % Agreement
Emerging market stocks
TIPS
International small cap
Emerging market bonds
Frontier markets
Public (listed) real estate
Capital protected strategies/ principal guarantee
Commodity equities
Leveraged/inverse ETF/ETN
GTAA (Global Tactical Asset Allocation)
130/30 505354
4945
353434
353027
222730
121717
121213
171716
383248
81112
Foreign exchange/currency
585959
413128
201220112010
201220112010
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3Event-driven, global macro, structured credit
3Natural resources, farmland, and timberland
3Master Limited Partnerships (MLPs)
3Floating rate loans
3Hedge funds
3Several participants listed hedge funds under “other strategies,” highlighting the confusion between alternative strategies and the vehicles in which they are offered.
Institutions: Other Alternative Strategies
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Advisors: What are Alternative Investment Strategies? Top 12, ranked by 2012 % agreement
% Agreement % Agreement
Volatility/option strategies
Collectibles (including art)
Leveraged/inverse ETF/ETN
Private debt
Foreign exchange/currency
Long/short (equity or debt)
Private real estate (direct or nonlisted REIT)
Private equity/venture capital
Arbitrage/market neutral
Commodities (physical)
Commodity futures
Managed futures (CTAs)
827871
827879
787378
768079
726771
716871
555260
5249
716467
827981
858483
201220112010
807672
201220112010
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Advisors: What are Alternative Investment Strategies? Bottom 12, ranked by 2012 % agreement
% Agreement % Agreement
Emerging market stocks
TIPS
International small cap
Emerging market bonds
Frontier markets
Infrastructure
Capital protected strategies/principal guarantee
130/30
Public (listed) real estate
GTAA (Global Tactical Asset Allocation)
Distressed securities
Commodity equities
475553
4347
4258
396470
3838
376472
2539
222915
222715
1823
243019
4938
201220112010
33
14
201220112010
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3Timber and farmland
3MLPs, precious metal, oil & gas
3Absolute return
3Business Development Companies (BDCs)
3Equipment leasing
3Structured notes
Advisors: Other Alternative Strategies
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Past and Future Alternative Growth
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No Growth
1–10%
11–20%
Institutions: Average Annual Growth in Alternative AUM Over Last Five Years
Usage has Declined
21–30%
Greater than 30%
789
14
23263420
39412339
97
148
2110
19171816
201220112010 2009
% Respondents
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Advisors: Estimated Average Annual Growth in Alternative AUMOver Last Five Years
10131214
35302931
36383629
678
12
3224
12101414
201220112010 2009
No Growth
1–10%
11–20%
Usage has Declined
21–30%
Greater than 30%
% Respondents
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33Institutions: Strategies Representing Largest AlternativeAllocation Over Last Five Years
Other alternative investment(s)
Private real estate (direct or nonlisted REIT)
Arbitrage/market-neutral
GTAA (Global Tactical Asset Allocation)
Public (listed) real estate
Private equity/venture capital
Long-short (equity or debt) 21
15
10
9
8
8
4
%
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3MLPs
3Global Macro Strategies
3Absolute Return
3Multi-Strategy
3Oil, Gas, and Natural Resources
3Fund of Funds and Hedge Funds
3Structured Credit
Institutions: “Other” Alternative Investment Strategies
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35Advisors: Alternative Strategy That Provided Greatest Growth to Business Over Last Five Years
Other alternative investment(s)
Long-short (equity or debt)
GTAA (Global Tactical Asset Allocation)
Private real estate (direct or nonlisted REIT)
Public (listed) real estate
1316137
109
10
9105
6199
171033
201220112010 2009
% Respondents
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3MLPs
3Structured Notes
3Risk Parity
3Oil and Gas
3BDCs
3Multi-Strategy
3They have no impact on the growth of my business
3I do not use alternative investments
Advisors: “Other” Growth-Driving Alternative Strategies
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Over 25%
16–20%
11–15%
6 –10%
Institutions: Allocation to Alternative Investments Over Time
21–25%1–5%
0%
19261825
19191822
1110
814
1010128
5661
31253426
5464
201220112010 2009
201220112010 2009
% Respondents % Respondents
38
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38Institutions and Advisors: Allocation to Alternative Investments in 2012
16–20%
11–15%
6 –10%
1–5%
0%
% Respondents % Respondents
Institutions InstitutionsAdvisors Advisors
54
1914
1927
1121
1015
Over 40%
36–40%
31–35%
26–30%
21–25% 59
44
31
31
214
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Institutions: Allocation to Alternatives Over the Next Five Years
3531
6111212
19161320
131417
17
16181016
8109
10
34263725
Over 25%
16–20%
11–15%
6 –10%
21–25%1–5%
0% 201220112010 2009
201220112010 2009
% Respondents % Respondents
40
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% Respondents
40Institutions: Top Alternative Strategies for Increased Allocation
14
12
10
8
7
7
7
Private equity/venture capital
Volatility
Managed Futures
Arbitrage/market-neutral
Public (listed) real estate
Other alternative investment(s)
Long-short (equity or debt)
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Advisors: Anticipated Annual Growth in Alternative AUM
Greater than 30%
21–30%
11–20%
1–10%
0% 895
11
45444035
33313435
10111311
5688
201220112010 2009
% Respondents
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Advisors: Top Alternative Strategies for Growth of Business
Emerging-Markets Stocks
Private Debt
Global Tactical Asset Allocation
Long/Short Equity or Debt
Private Real Estate 12
10109
9109
721
64
10
% Respondents
Other alternative investment(s) 2012 1420112010
158
89
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3Institutions were more extreme in their usage of alternative investments than advisors in 2012; 21% responded that they allocated over 40% of their portfolios to alternative investments, while 43% allocated 10% or less to alternatives.
3On the other hand, 63% of advisors allocated somewhere between 6% and 20% of their clients‘ portfolios to alternative investments. Only 15% of advisors anticipated allocating over 20% to alternative investments over the next five years.
3Institutions are considering primarily long-short equity and private equity for increased allocation over the next five years, while advisors are interested in private real-estate and long-short equity.
Alternative Investment Growth: Conclusions
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Alternative Investment Drivers and Disincentives
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Institutions: Importance of Alternative Investments Relative to Traditional Investments
Much More Important
Somewhat More Important
As Important
Somewhat Less Important
Much Less Important 2012 1120112010 2009
121013
21222123
27353035
20162117
% Respondents
20161912
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Advisors: Importance of Alternative Investments Relative to Traditional Investments
14128
14
31232529
28243134
20292113
8121511
Much More Important
Somewhat More Important
As Important
Somewhat Less Important
Much Less Important 201220112010 2009
% Respondents
47
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47
Enhance Yield
Offer clients investments they wouldn‘t find on their own
Absolute Returns
Poor Bond Market Outlook
Enhance Risk-Adjusted Profile
Diversification/Low Correlation
Institutions and Advisors: Top Drivers of Investments in Alternatives
7875
5547
4537
1629
1328
1418
InstitutionsAdvisors
% Respondents
48
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48
Lack of clarity on how strategy works in portfolio framework
Benefits are Uncertain
Lack of Transparency
Lack of Liquidity
Fees
Institutions and Advisors: Top Reasons to Hesitate Investing in Alternatives
5551
4842
2830
3330
1422
InstitutionsAdvisors
% Respondents
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Fees 51463738
Advisors: Top Reasons to Hesitate Investing in Alternatives
Lack of Liquidity 42405261
Lack of Transparency 30283739
Benefits are Uncertain 3028
201220112010 2009
% Respondents
50
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55383739
Fees
Institutions: Top Reasons to Hesitate Investing in Alternatives
48445768
Lack of Liquidity
28355063
Lack of Transparency
3331
Benefits are Uncertain
201220112010 2009
% Respondents
51
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Institutions: Investment Vehicles Used to Access Alternative Strategies
130/30 CommodityFutures
628
27
Hedge Funds/Private PoolsMutual FundsETFs/ETNsManaged Accounts
Hedge Funds/Private PoolsMutual FundsETFs/ETNsManaged Accounts
1735148
Arbitrage/Market Neutral
2543
36
Distressed Securities
332133
Capital ProtectedStrategies
713
23
Emerging Markets Bonds
56887
Commodities(Physical)
61631
4
Foreign Exchange/Currency
935169
CommodityEquities
43817
9
Frontier Markets 44773
% Respondents % Respondents
Collectibles(Including Art)
4302
EmergingMarkets Stocks
4621311
52
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Institutions: Investment Vehicles Used to Access Alternative Strategies
Global Tactical Asset Allocation
Infrastructure
InternationalSmall Cap
Private Debt
2232
26
Private Equity/VC
2645
26
Public/ListedReal Estate
2621010
TIPS
1231
63
Volatility/OptionStrategies
748
410
Leveraged/Inverse ETF/ETN
Long/Short(Equity or Debt)
Managed Futures(CTAs)
1620144
448156
243135
22938
42505
31203
PrivateReal Estate
47
350
Hedge Funds/Private PoolsMutual FundsETFs/ETNsManaged Accounts
Hedge Funds/Private PoolsMutual FundsETFs/ETNsManaged Accounts
% Respondents % Respondents
53
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Advisors: Investment Vehicles Used to Access Alternative Strategies
14623
4
130/30 CommodityFutures
12134
3
Arbitrage/Market Neutral
Distressed Securities
1433
Capital ProtectedStrategies
Emerging Markets Bonds
0926
Collectibles(Including Art)
EmergingMarkets Stocks
958
56
Commodities(Physical)
Foreign Exchange/Currency
137
42
152103
244226
068232
177152
173234
7391711
CommodityEquities
Frontier Markets
Hedge Funds/Private PoolsMutual FundsETFs/ETNsManaged Accounts
Hedge Funds/Private PoolsMutual FundsETFs/ETNsManaged Accounts
% Respondents % Respondents
54
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Advisors: Investment Vehicles Used to Access Alternative Strategies
Global Tactical Asset Allocation
Private Debt
1240
511
Infrastructure Private Equity/VC
1457
76
Leveraged/Inverse ETF/ETN
Public/ListedReal Estate
07315
1
Long/Short(Equity or Debt)
TIPS
53712
1
Managed Futures(CTAs)
Volatility/OptionStrategies
256
711
InternationalSmall Cap
422197
052261
12721
27827
17623
043130
PrivateReal Estate
01043
2
Hedge Funds/Private PoolsMutual FundsETFs/ETNsManaged Accounts
Hedge Funds/Private PoolsMutual FundsETFs/ETNsManaged Accounts
% Respondents % Respondents
55
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3Fees and lack of liquidity remain the foremost concerns regarding alternative investments for both institutions and advisors.
3Both institutions and advisors are seeking diversification and enhanced risk-adjusted returns from alternative investments over absolute returns.
3Institutions are increasingly using mutual fund vehicles for many types of alternative strategies (arbitrage/market neutral, long-short equity, managed futures, and global tactical asset allocation, for example) and asset classes (commodities or emerging markets stocks and bonds, for example).
Drivers and Disincentives: Conclusions
56
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Hot Topics in 2012
3Hedge Fund Gates3Managed-Future Performance Fees3Managed-Futures Expense Ratios3Active ETFs3Hedge Fund Replication
57
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57Hot Topic: Hedge Fund Gates
No, redemption gates do not deter me from investing in hedge funds.
No, I don‘t invest in hedge funds anyway.
Yes, gates make me somewhat more reluctant to invest in hedge funds.
Yes, gates cause me to seriously reconsider investing in hedge funds at all.
107
2619
4263
2210
InstitutionsAdvisors
% Respondents
Has the recent attention surrounding hedge fund redemption gates (Salient Endowment Fund, Perella Weinberg Partners, Alden Global Distressed Opportunities, etc.) caused you to reconsider hedge fund vehicles?
58
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3Most institutions and advisors responded that hedge fund gates were not an issue, because they do not invest in hedge funds in the first place, preferring liquidity.
Hedge Fund Gates
3Advisor comments:
3“Liquidity is a huge issue for our clients. Operationally, we know many hedge fund strategies don’t require lock-ups/gates. That is why we see so many moving to 1940 mutual fund structures.”
3“After 2008-09 with the gates coming down most of our high net worth investors were “done” with the old platform, but they realize they need these type of strategies in their portfolios and although they realize they are giving up some of the “juice” (leverage, private equity), they are more comfortable with a liquid mutual fund exposure”
59
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3Institutions that did invest in hedge funds were concerned about hedge fund gates.
Hedge Fund Gates
3Institution comments:
3“Always something we concern ourselves with, but hasn‘t changed the feeling that we should invest in hedge funds.”
3“Gates makes us more cautious of certain types of hedge strategies that are more likely to impose gates”
3“They make us truly look for an illiquidity premium when investing”
60
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60Hot Topic: Managed-Futures Performance Fees
No, they shouldn‘t be allowed to charge performance fees, as other mutual funds cannot.
5867
Yes, they should be allowed to charge performance fees.
4234
% Respondents
InstitutionsAdvisors
Do you believe managed-futures mutual funds should be able to charge performance fees?
61
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3The majority of advisors and institutions responded that managed-futures mutual funds should not charge performance fees.
3Those who believed performance fees should be allowed were concerned about transparency and performance benchmarks.
3Both groups believed that the market would decide whether paying performance fees are worthwhile.
Managed-Futures Performance Fees
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3Advisor comments:
3“All the mutual funds should be treated equally. If managed- futures wants to get into mutual funds arena, they should follow the same rule.”
3Institution comments:
3“They should be able to charge performance fees, but the transparency of fee disclosure is a concern.”
3“Yes, above the manager specific benchmark.”
3“All funds should have the discretion to charge whatever level and type of fees they want. The marketplace can decide whether to pay them.”
Managed-Futures Performance Fees
63
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63Hot Topic: Managed-Futures Expense Ratios
No 1411
Yes 8689
% Respondents
InstitutionsAdvisors
Do you believe managed-futures mutual funds’ performance fees should be included in their expense ratios?
64
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Managed-Futures Expense Ratios
3The vast majority of advisors and institutions believed that performance fees should be included in a fund’s expense ratio.
3Advisor comments:
3“By including it in the expense ratio, it provides more transparency and allows investors to compare the investments on equal footing.”
3“There should be a separate line item in any analysis that shows the performance fee for each year in order to give investors a true representation on how performance affects compensation.”
65
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Managed-Futures Expense Ratios
3Institution comments:
3“[Performance fees] should be disclosed in same area as expense ratios but broken out and aggregated.”
3“A performance fee by nature will be variable, so including it in a static expense ratio would not be appropriate. It must however be disclosed.”
66
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66Hot Topic: Active ETFs
No, I prefer other vehicles to gain access to alternative strategies.
4428
Yes, I am interested in gaining access alternatives through ETFs.
5672
% Respondents
InstitutionsAdvisors
Now that the SEC has lifted the moratorium on derivative usage in ETFs, and now that actively managed ETFs (PIMCO Total Return BOND, for example) have gained some traction, are you interested in gaining access to more alternative strategies through ETFs?
67
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Active ETFs
3Advisors, and to a lesser extent institutions, are interested in gaining access to more alternatives strategies through ETFs, now that derivatives can be used in these vehicles.
3Advisor comments:
3“Pricing on Managed ETFs has not been favorable, but the tax efficiency an ETF can provide, especially in the alternative space, would be attractive.”
3Institution comments:
3“If they are truly fee advantageous.”
3“We prefer other vehicles to gain access to alternative strategies, but alternative ETFs would be an option in gaining access to this asset class for certain clients.”
68
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68Hot Topic: Hedge Fund Replication
Not applicable—I‘m not sure what a hedge fund replication strategy is.
No, I was never interested in hedge fund replication strategies.
No, I am no longer interested in hedge fund replication strategies.
Yes, hedge fund replication strategies still have some appeal.
Yes, I am still a big proponent of hedge fund replication strategies.
86
3942
56
4237
69
InstitutionsAdvisors
% Respondents
Now that more and more hedge fund strategies can be directly accessed through mutual funds or ETFs, do hedge fund replication strategies still appeal to you or your clients?
69
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Hedge Fund Replication
3Despite the availability of direct hedge fund strategies in mutual funds and ETFs, hedge fund replication is still of interest to some advisors and institutions.
3Advisor comments:
3“Regulation, Tax Transparency, Liquidity, and Transparency are the keywords.”
3“I am concerned that, while beta may be replicated, the opportunity of alpha will be lost.”
3Institution comment:
3“Replication holds good promise, but has yet to deliver in a way that would cause serious consideration. Still we’re keeping an eye on it.”
70
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EditorsNadia Papagiannis, Director of Alternative InvestmentsJosh Charney, Alternative Investments AnalystAlexa Auerbach, Director of Corporate Communications, Institutional BusinessBeverly Goodman, Mutual Fund Editor at Barron‘s Survey Results Analysts Design Joyce Chen Claire GaynorCaroline Gorman Bojan RadojcicDavid McFarlin Alexander HayashiJulia Wu
Credits
71
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar, is prohibited.
Josh Charney312 [email protected]
Alexa Auerbach 312 [email protected]
Questions?
