Institutional demand for liquid alternatives continues to rise

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The volume of absolute return and alternative Ucits funds approved for distribution in Germany increased by almost 6% to €276bn in the first half of 2018. Demand was primarily driven by institutional investors, who accounted for more than 70% of inflows. Global macro and market neutral equity strategies were particularly in demand. Overall, the fund universe became increasingly concentrated, with the top 5% (40 funds) managing 46% of total volume.

The challenging market environment of rising returns and predominantly weaker equity markets is also being reflected in 2018 performance. Although the average return of all evaluated funds in the first six months of the year was just -0.36%, this meant that they outperformed hedge funds, European equities and corporate bonds. Long/short funds that primarily invest in the USA or worldwide achieved positive returns.

Global macro and market neutral equity funds also reported a moderately positive performance. Over the last five years, the average return of the evaluated absolute return and alternatives funds was 2.55%, which meant the funds hit their self-imposed targets. This is evident in the absolute return study carried out by Lupus alpha every six months. The Frankfurt-based asset management company has been analysing this market since 2008 based on data from fund analysis company Thomson Reuters Lipper.

While traditional absolute return funds dominated in the first few years of the study, liquid alternative approaches pursuing similar strategies to hedge funds now experience the strongest demand. For comparison, absolute return approaches made up almost two-thirds of the universe as recently as 2014, but accounted for just 43% by June 2018. Strategies for investors looking to reduce the overall risk of their portfolio are particularly in demand. These are primarily hedge-fund-like concepts with minimal correlation with traditional asset classes such as equities and bonds.

“Liquid alternative investment strategies have now become an integral part of the asset allocation activities of institutional investors,” said Ralf Lochmüller, founding partner and spokesman of Lupus alpha.

“These strategies are designed to provide sustainable benefits by offering risk-adjusted returns measured against a positive Sharpe ratio and low correlation with other asset classes. The overwhelming majority of the evaluated funds achieved this over five years, with almost 80 per cent generating a positive Sharpe ratio,” Lochmüller explained.

The growing importance attached to liquid alternatives by institutional investors is also clear from volume growth between January and June 2018. Of the €15bn that flowed into the segment during this period, €10.8bn came from institutional investors. As a result, their share of the universe – expressed as a percentage of institutional asset classes – rose to 41.6%. For comparison, this share stood at less than one-third in 2012.