Investors will be on the hunt for alternatives managers more than any other type of manager this year, according to a new survey of consultants' expected searches for 2008.
Some 80% of consultants surveyed said they expect to focus on alternatives in general this year, with a particular demand for hedge funds, according to the 2008 Consultant Search Forecast from Casey Quirk & Associates LLC, Darien, Conn., and eVestment Alliance, Marietta, Ga.
Other alternative investment searches will include private equity and real estate. International equity managers also are expected to be highly sought after.
We knew alternatives would be important, Yariv Itah, partner at Casey Quirk, said in an interview. We did not know the extent to which this would drive flows.
The firms surveyed 74 consultants that placed about $550 billion in assets through some 4,000 searches in 2007.
Of the 61 U.S. consultants surveyed, one-third said searches for alternatives managers will be directed only to hedge fund managers, with many leaning toward funds of funds.
Many of the institutional investors will be those that originally took a wait-and-see approach to investing in hedge funds.
What's driving demand now is the second wave of investors, said Mr. Itah. New entrants to the hedge fund market will feel more comfortable getting their feet wet through hedge funds of funds, he said.
David Hammerstein, chief strategist at consulting firm Yanni Partners Inc., Pittsburgh, agrees. Small to midsize investors recognized that when the equity markets stumbled in the early 2000s, hedge funds initially had a rough go, but then recovered, he said. Those investors are taking a cue from the past, he said. They've concluded the current dislocations in the market provide a good time for entry.
Mr. Hammerstein estimates about 10% to 15% of Yanni's 115 clients, which have an average of $175 million each in assets, are considering making maiden investments in hedge funds this year.
For those investing directly in hedge funds, long/short and multistrategy funds will be the most popular, the survey showed. That's because most investors will try to avoid the more exotic or complex strategies, according to the survey.
Real estate, especially international, is another asset class that will continue to catch the eye of investors. While the survey does not quantify how much interest there will be in real estate, consultants indicated they expect to see significant growth in real estate searches.
Real estate continues to be an attractive source of diversification, Mr. Itah said, noting investors will look to overseas real estate for higher returns.
A lot of the real estate opportunities in the next five years will be overseas in high-growth areas, not in developed markets, said Mr. Itah. Managers with global real estate capabilities will benefit most, he noted.
Overseas equity also will be an area of focus. Foreign equity is expected to be the second most common search in 2008 for all consultants, according to the survey, while Canadian consultants expect this to be the top asset class for searches. Regulatory changes in Canada allow investors to funnel more of their assets outside of the country's borders, Mr. Itah said.
Across the board, more investors are looking at global portfolios instead of international-only ones, the survey showed. This year, 27% of consultants surveyed said they prefer global equity over international portfolios vs. 16% in 2007.
The most recent high-profile move to global portfolios was made by the $240.6 billion California Public Employees' Retirement System, Sacramento. In December, the board approved replacing the pension fund's international and domestic equity portfolios and lumping them into a global equity portfolio (Pensions & Investments, Dec. 24). The fund also approved shifting half of the fund's assets to overseas investments in order to better reflect a global marketplace.
Contact Raquel Pichardo at [email protected]