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Information briefing
Alternative multi-managers
April 2015
Investors in liquid
alternatives – target
performance, liquidity and
flexibility
Accelerating investments in liquid
alternatives
Investments into hedge funds grew since
2010 from USD 1.9 trillion to USD 2.8
trillion. Part of this growth was fueled by
increased
investment
in
liquid
alternatives. Over the past 4 years, assets
under management (AuM) in liquid
alternatives in both UCITS and 40 Act
formats grew 46.7% and 24.7%,
respectively (see compound annual
growth rates below).
Gilles Flament, Head of Alternative
Investments at BNP Paribas Wealth
Management, answers our questions on
the liquid alternative industry, the rise in
investor interest and investors’ allocation
choices.
Gilles, can you explain the role of your
team?
Our team develops alternative investment
solutions to meet the specific needs and
expectations of all our clients. We define
the suite of investments, we research and
select products, and we provide on-going
advice and risk monitoring on our clients’
chosen solutions.
When did you start to consider liquid
alternatives?
We began in early 2010 – at this time the
market for liquid alternatives was poised
for growth. The product was attracting
investor interest in terms of liquidity and
as an avenue to different strategies.
Meanwhile, regulation was facilitating
access to liquid alternatives. We put in
place the first set of client solutions in
March 2011.
Sources: BNP Paribas Securities Services Market Intelligence calculation based on HFR database (20102014) and Citi Investor Services analysis based on Morningstar data (May 2014)
What changes have paved the way for
the emergence of liquid alternatives?
What are the changes on the horizon
for the industry?
Firstly, the global financial crisis drove
demand towards more liquid investments.
In addition to alpha generation, investors
started looking for underlying safety and
liquidity.
Market players and products are
continually evolving and we can see a
convergence of strategies and products.
Secondly, given the low interest rate
environment and the high valuation of
equities, it makes sense today for
investors to increase their allocation to
alternative investments.
On one hand, traditional investment
managers are adopting strategies and
techniques historically used by alternative
fund managers – such as long/short, one
of the most popular strategies, and
leverage to the extent permitted within the
UCITS framework.
In parallel, developments under the
UCITS and 40 Act regulations have
facilitated access to liquid alternatives for
all investors.
On the other hand, alternatives are
moving into liquid products, previously
associated with traditional long-only
investments.
Which investors are taking the liquid
alternatives route and why?
Investors across the spectrum are
investing in liquid alternatives. This
includes institutional investors, although
our focus is on high-net worth individuals.
These investors are definitively attracted
to the balanced value proposition of a
favorable risk/return profile and broad
range of market strategies, combined with
greater liquidity and regulatory oversight.
What is the target allocation to liquid
alternatives and what liquid alternative
solutions do you offer?
Globally speaking, we recommend our
wealth management clients to invest 15%
of financial assets in alternatives.
And the challenges?
We focus on two aspects – adapting the
guiding principles of our investment
approach and investor education.
We are now at the intersection of the two
domains and we see many fund
managers proposing products close to the
limits of the new frontier. However, not all
strategies, techniques or management
styles are appropriate given the liquidity
expectations.
Managers who are new to liquid regulated
products must be able to demonstrate
that their strategies are really compatible
with the expected liquidity (mainly daily
and weekly). This, at that same time as
continually being able to capture
performance while limiting the downside.
We offer a range of close to 30 funds,
mainly single funds, covering all types of
liquid alternative strategies such as
long/short equity, equity market neutral,
global macro, CTA and long/short credit.
Moreover, with many fund managers
crossing over to liquid alternatives, they
have the responsibility to ensure they
implement their strategy in full respect of
the regulations governing UCITS and 40
Act funds.
Our suite of investments is currently built
around US and European managers
some of which are well known and others,
niche players. Among our funds we count
a number of very successful performers
that are now hard closed or soft closed.
But our goal is to continually seek out the
new up and coming fund managers.
So when I invest on behalf of our clients, I
ask of every strategy and fund the
question of whether it is acceptable and
reasonable to use the chosen techniques.
Take for example, a fund manager who
uses total return swaps to deliver the full
return of a fund. I would question the
objectives and risks of using such
April 2015
techniques and how it benefits the
investor.
Equally important is investor education.
As liquid alternatives become more
accessible, the public needs to be better
informed of the value added and
characteristics of such products. The
distinction between what a liquid
alternative is versus a traditional long-only
product may be a challenge for investors
and the possible misconceptions can
shake confidence in the industry.
Because an alternative investment is
liquid, it does not necessarily mean it has
a simple strategy.
Last but not least, what is your outlook
for 2015? Which strategies have a
positive outlook?
We are positive on 3 strategies for 2015:
global macro, long/short equity, and
relative value.
The dissociation of economic cycles
across regions and markets combined
with the greater visibility on central bank
policies has globally improved a fund
manager’s ability to anticipate market
developments. For this reason, we have a
positive view on global macro strategies.
The second strategy we are upbeat on is
long/short equity. The markets are
returning to fundamentals, which creates
dispersion. In other words, the context
lends to a stock picker’s market in which
he/she can more efficiently separate the
wheat from the chaff.
Third, relative value. The current context
of flat or irrational yield curves creates
opportunities for arbitrage vis-à-vis the
evolution or shift of the curve.
Having said this, there are also many
more strategies available for investors
beyond the liquid alternative space that
provide
different
and
attractive
advantages.
For additional information, please
contact
Jacques Bofferding
Head of Alternatives Financing
BNP Paribas Securities Services
+44 207 595 51 70
[email protected]
Gilles Flament
Head of Alternative Investments
BNP Paribas Wealth Management
+33 (0)1 4316 9321
[email protected]
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April 2015