According to the financial market, more financial advisors indicated that alternative assets will “become as important or more important than traditional investments in the next five years.”
Additionally, baby boomer investors are scrambling to make up for retirement funds lost in traditional markets, and are demanding new solutions.
The aggressive central banks reaction to the financial crisis and public debt explosion could result in a less benign inflation environment. In our meeting we acknowledged that inflation at around 3% - 5% cannot be ruled out for the developed markets in the medium term. Negative real rates on core government bonds are the new normality. For this reason the primary objective of long-term investors should be protection of purchasing power. So, it is not surprising that some investors are moving towards real assets.
Some of these real assets, such as property investments, are already part of investor’s asset allocation, others, like infrastructure investments, are gaining ground in the current environment.
Population growth in Emerging Markets will probably fuel demand for natural resources and commodities which have already experienced an upward trend in recent years.
Commodities investments have become popular given the development of the ETF market. While this trend has resulted in increasing correlation between the general commodities market and the equity market, diversification opportunities are still available by selecting single commodities. Therefore, with the commodity market becoming more mature, the selection activity becomes increasingly important.
Study, asset allocation to alternative assets (including property, hedge funds, private equity and commodities) in the seven largest pension fund markets has increased from 5% in 1995 to 20% in 2011 while at the same time the allocation to equity and bonds has decreased.
Most of this growth comes from the hedge fund industry where institutional investors, allocation is on the rise. According to data from Hedge Fund Research, total hedge fund assets surged to a new record in the last quarter with around $2.2 trillion of assets under management. The institutional investors share of this industry has increased from 40% in 2007 to 60% in 2011 and this trend is forecast to continue in the next years. As stated by the 2012 Citi Prime Finance Annual Research, the “hedge fund industry may experience a second wave of institutional allocations over the next 5 years that could potentially result in another 1 trillion increase in AUM by 2016”.