With more investment vehicles that defy asset-class definition hitting the market every day, some industry insiders question whether the term “alternative investment” still makes sense.
“Alternative investment managers” will disappear in about a decade, leaving only “money managers,” predicted James P. McCaughan, president, global asset management, and CEO of Principal Global Investors, Des Moines, Iowa.
“Portfolio management is not the same” as it used to be, Mr. McCaughan said.
Principal is working on investment strategies that are more focused, more absolute return and benchmark agnostic, he said. Those strategies combine liquid and illiquid investments, and active and passive investments.
Principal also has a strategy combining passively managed emerging market equity and debt with a hedge fund.
In the real estate area, some examples of convergence are real estate investments in multistrategy portfolios and collective investment trust-based multiasset strategies. “A symptom of convergence is a greater use of real estate in other strategies,” Mr. McCaughan noted.
Much of the convergence is being driven by the opportunities managers are seeing in the market, said Nicholas Tsafos, audit partner in New York with accounting firm EisnerAmper LLP.
One example is when midsize and small companies could no longer get financing from banks after the financial crisis. Alternative investment managers filled the gap, providing financing, he said.
“It juiced up returns,” Mr. Tsafos said.
Others in the industry say convergence is the result of investor actions.
“Things today are less neatly compartmentalized. It is less driven by asset managers, rather the needs of investors,” said Jacques P. Chappuis, managing director and head of solutions at The Carlyle Group, New York. “Some asset managers are not able to offer such sophisticated customization across multiple asset classes.”
Asset owners increasingly are trying to look at asset classes as packages of risk, Mr. Chappuis said.
“Investors are developing the understanding that any product is a package of risk factors and labeling them in artificial containers may not be the best way to choose the options that are out there,” he said.
Alternative investments are maturing as an asset class, said Peter Martenson, head of global distribution and partner in the La Jolla, Calif., office of placement agency Eaton Partners LLC.
Alternative investments are being pushed “deep into pension plans,” Mr. Martenson said. Private equity is moving into global equity allocations and bonds are moving into credit allocations that have both public and private debt in the same portfolio.
The convergence is being driven by the “consumer of products as well as consultants,” he said.
Traditionally private equity investments are long-term lockup vehicles — 10 years or more — and hedge funds have medium- to short-term lockups. But these distinctions are blurring, Mr. Martenson said.
Lockup periods now are being established to better match the duration of the investment, rather than to fit the traditional structure of a private equity fund or hedge fund, he said.
“One fund ... does (non-performing loans), non-performing mortgages. It looks like a hedge fund when you look at the terms, but on the other side it looks like private equity because there is no day-to-day trading and day-to-day liquidity,” Mr. Martenson said.