Institutions are Bullish on Alternative Assets. So are Retirement Investors.
Investors are bullish on alternative investments. Just how bullish? So bullish that the global alternative assets industry is forecast to grow nearly 60% by 2023, surging from $8.8 trillion in assets under management to $14 trillion.
This prediction comes from “The Future of Alternatives,” a Preqin report that focused on institutional usage of alternative assets, which it defines as private capital plus hedge funds. The results were based on a 2018 survey of 300 fund managers and more than 120 institutional investors, as well as Preqin’s proprietary data.
“Could the $14tn forecast be too high?” Preqin CEO Mark O’Hare asks in the report. “Possibly, but we believe there is significantly more upside risk than downside.”
Preqin isn’t the only firm closely tracking institutional investors’ growing use of alternative investments. Research from Pensions & Investments found that in the past 10 years foundations have significantly expanded their allocation to “other” investments—alternative assets such as private equity, hedge funds, and real estate. In 2007, those investments accounted for $70.6 billion, or about 40% of total assets of the 49 largest private foundations. In 2016, such investments had grown to $136.3 billion, or about 60% of total assets.
As I’ve discussed on PENSCO’s blog, the explosive growth and increasing adoption of alternative assets were triggered, in part, by the 2008 financial crisis that left a trail of disaster in its wake. Credit markets froze, volatility soared, and many investors suffered losses in both the equity and fixed income side of their portfolios.
Seeking shelter, investors sought assets that are outside of the standard exchanges, searching for more diversity; in the process, they became more comfortable incorporating alternative investments into portfolios.
Today, investors are including alternatives as part of their asset allocation mix to mitigate risk as traditional asset allocations no longer offer the same potential for portfolio diversification as they did in the past. According to Morningstar, in the last 10 years, a 60/40 portfolio—a portfolio that has a 60% allocation to equities and a 40% allocation to bonds—moved in the same direction as the stock market 99% of the time.
Preqin estimates the industry’s growth in the next five years will be driven by:
- Alternatives’ track record and ability to deliver superior risk-adjusted returns
- Investors’ need to generate market-beating returns
- The steady decline in the number of listed stocks
- Growing opportunities in private debt
- The massive opportunity in emerging markets
At PENSCO, we’re celebrating three decades of helping retirement investors hold alternative investments in their self-directed IRAs. Over those years we’ve watched as alternatives have gained widespread traction with retirement investors. Just as institutional investors are increasingly drawn to these assets, so too are our clients.
Retirement investors are becoming more and more aware that an allocation to alternatives has the potential to deliver excess returns while reducing risk in their nest eggs.1 And by owning alternative assets in a self-directed IRA, investors gain the added potential benefit of tax advantages.
With the bull market’s momentum slowing and markets experiencing heightened volatility, we expect alternative assets will become even more mainstream as investors—both institutional and retirement investors—seek to manage market swings with hopes of limiting their downside risk.
1-The IRS has cautioned that alternative assets in an IRA have their own unique risks such as a lack of disclosure and liquidity—as well as the risk of fraud.
This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.
PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. PENSCO is indirectly affiliated with a registered broker dealer and with a licensed small business investment company through Opus Bank (“Opus Affiliates”). Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.