Alternatives investors look to emerging markets

The overall appetite for alternatives is set to rise further over the coming years, according to a report from BNY Mellon and FT Remark.

Investors in alternative assets have their eyes set on emerging markets. Of their overall allocation to alternatives, they plan to target about a third to assets in new markets, according to a report from the Bank of New York Mellon and the Financial Times’ research service FT Remark.

The Split Decisions: Institutional Investment in Alternative Assets report revealed that emerging markets make up 31 percent of institutional investors’ current alternative allocations. Asia-Pacific based investors have allocated the most to emerging markets with 54 percent of their alternatives portfolios targeted at those markets, followed by the Europe, Middle East and Africa at 29 percent and the Americas at 16 percent.

“Very few investors and asset managers in the US and Europe understand just how radically Asia is going to change the alternatives space over the next decade,” Ed Rogers, CEO of Rogers Investment Advisors said in the survey. “The sheer scale of allocation capital that will come out of the newly enriched Asian investor base will dramatically alter the way business is conducted.”

Among institutional investors targeting alternative assets, private equity is the most popular and is expected to enjoy continued strong demand, the report said. Private equity accounted for 37 percent institutional investors’ asset allocations, the largest segment, followed by infrastructure at 25 percent, real estate at 24 percent, and hedge funds at 14 percent.

Frank La Salla, chief executive officer of Alternative Investment Services and Structured Products at BNY Mellon said in the report that alternative assets are gaining ground in institutional portfolios because these offer return-boosting strategies such as using leverage to magnify returns, increasing concentration on specific sectors, as well as holding investments with long-term horizons.

Of the 400 senior executives from institutional investors surveyed, the majority said that returns from their alternatives investments had met or exceeded their expectations.

Over half of respondents said they would increase their allocation to private equity, more than a third sought to increase their exposure to real estate, 40 percent to infrastructure and 26 percent to hedge funds. For PE in particular, 90 percent of respondents said they would likely increase exposure to their own regional market when considering further investments.

“Alternatives continue to gain share in portfolios, but institutional investors are becoming more selective about where and how they deploy their capital,” said La Salla. “As a result, they are demanding greater transparency from their alternative fund managers. This survey reinforces the notion that investors and fund managers alike will need growing levels of support, insight and data to make informed decisions.”

The study noted that despite increasing flows of capital to alternative assets, fund managers need to adapt and innovate to attract a share of this as investors are increasingly more discerning about how and where they deploy capital.

When committing to a private equity fund, respondents said projected returns was the most important factor, followed by past performance, strategy, alignment of objectives, sector expertise, level of fees, and quality of management team.

BNY Mellon is a global investment company with over $1.6 trillion in assets under management.