McKinsey: Assets in alternatives reach record high of $7.2 trillion

Alternative AUM grows at twice the rate of traditional investments since 2005

Alternatives are continuing to see net inflows, with assets hitting a global record high of $7.2 trillion in 2013, said a report released Wednesday by McKinsey & Co.

The alternatives category — which McKinsey defines as hedge funds, funds of funds, private equity, real estate, commodities and infrastructure — has now doubled in size since 2005, with global AUM growing at an annualized pace of 10.7%, twice the growth rate of traditional investments.

Net inflows into alternatives as a percentage of total assets were 6% in 2013, compared to the 1% to 2% rate for non-alternatives.

“The demand for alternatives has never been higher,” said Ju-Hon Kwek, an associate principal in McKinsey's wealth and asset management practice and co-author of the report, in a telephone interview. “The demand is being driven by both cyclical and structural factors. There's been a fundamental change in the way people are thinking about asset allocation that's expanded the aperture.”

Onur Erzan, a senior partner in McKinsey's wealth and asset management practice and also a co-author of the report, added in the same interview: “Alternatives became seen as tools that facilitate outcome-oriented investing. That thinking is driving some of the demand.”

The report asserts that net inflows in the global alternatives market are expected to grow at an average annual pace of 5% over the next five years, well above the 1% to 2% expected annual pace for the industry as a whole. By 2020, alternatives could make up about 15% of global industry assets and produce up to 40% of industry revenues. At the end of 2013, alternatives made up 12% of global industry assets and 33% of industry revenues.

“Alternatives are increasingly becoming part of the mainstream,” Mr. Kwek added.

The report was a result of McKinsey's 2013-2014 Alternative Investment Survey, which polled nearly 300 institutional investors managing $2.7 trillion in total assets and included more than 50 interviews with a cross section of investors by size and type.

A copy of the full report can be requested by visiting McKinsey's website.