The inexorable move into alternative investments by institutional investors is reshaping the money management business.
Facing uncertain long-term returns for equities and fixed income and declining funding ratios, institutions have poured tens of billions of dollars into alternative investment strategies — real estate, private equity, hedge funds, venture capital, real assets and credit — at the expense of long-only money managers, sources said.
With close to $1 trillion invested in alternative strategies by the 200 largest U.S. defined benefit plans as of Sept. 30, up from $680 billion as of Sept. 30, 2008, and $232 billion and $148 billion, respectively as of the same date in 2003 and 1998, money hemorrhaging from old-fashioned managers over the past 15 years has been substantial, according to Pensions & Investments' data.
“Alternative investment firms have been the disruptive force in the money management industry,” said Kevin P. Quirk, co-founder and partner at Darien, Conn.-based Casey, Quirk & Associates LLC, a management consultant to investment companies.
“Alpha and beta separation is the new investment foundation, and traditional managers have been at the losing end. They have had a hard time holding on to assets,” Mr. Quirk said.
A number of large, institutionally oriented private equity and hedge fund managers wasted little time in expanding their businesses from a single focus to converge a broader spectrum of alternatives investment approaches, including:
- The Blackstone Group LP, which managed $271.7 billion in private equity, real estate, credit, hedge funds of funds, credit and mutual fund strategies;
- The Carlyle Group LP, which managed $198.9 billion in private equity, real estate, and hedge funds- and real estate funds of funds;
- Apollo Global Management LLC, which managed a total of $159 billion in private equity, real estate and credit strategies;
- KKR & Co. LP, which managed $102.3 billion in private equity, real estate, energy and hedge funds-of-funds approaches;
- Fortress Investment Group, which managed $62.5 billion in private equity, credit, global macro hedge funds and long-only strategies; and
- Och-Ziff Capital Management Group LLC, which managed $42.6 billion in hedge fund, real estate and credit strategies.
(All asset figures are as of March 31.)
“There has been significant interest recently in convergence because there's so much efficiency in the public markets that it's tricky to generate alpha, there's more competition from intelligent money chasing it,” said veteran hedge fund attorney Steven B. Nadel, partner, Seward & Kissel LLP, New York.
Mr. Nadel said “everyone is dipping their toes into other people's water,” led by “hedge fund managers who are going after every bucket,” typically moving away from their more liquid flagship strategies that have monthly or quarterly liquidity toward lockup periods of between three and five years.