The rise of alternative managed funds

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The Global Financial Crisis (GFC) was a time that affected millions of people, including investors and asset managers. It demonstrated that there were significant risks and downfalls when investors placed their eggs only in the basket of traditional investments. The diversification benefits of investing across highly correlated asset classes were evidently unsatisfactory. Investors failed to see the benefits of implementing alternatives as a strategy against general risk and worldly impacts such as the 2008 crisis. Thus, investors faced dramatic drops of performance within the value of their portfolios due to a lack of genuine diversification against underlying correlations.

Despite tragic consequences of the financial crisis, it marked a turning point of growth for alternative investments. Globally, alternative assets doubled between 2005 and 2011 to $6.5 trillion with a compounded annual growth rate of 14%. Within Australia, alternative assets are growing also, listed as the fourth largest in the world and first in the Asian-Pacific region and totalling to US$275 billion in the alternative investment industry. On a global and Australian perspective, the alternative investment industry is set to outperform traditional assets in the future, where the global alternative assets are predicted to increase 9.3% Compound Annual Gross Rate (CAGR) by 2020.

A shift in growth patterns will take place for both traditional and alternative investments. Traditional active investments will continue to be the main asset of the financial industry but is expected to shrink from 79% in 2012 to 65% in 2020. In comparison, alternatives will make a cross roads, expected to rapidly grow from 13% of total assets managed with an upward prediction.

Pairing the gradual growth of alternative assets and decline of traditional assets suggests that the term ‘alternative’ may no longer remain in common usage by 2020 or thereafter. During periods of possible financial market volatility and economic uncertainty around the globe, the benefits of investing in alternative assets alongside highly correlated portfolios and low barriers to entry will continue to attract investors – thus, subjecting alternative investments to become the new mainstream strategy.

Alternative investments are only the beginning of a new wave of growth. Investors expect by the end of 2013 to increase their allocations to almost all forms of alternatives – particularly more liquid hedge funds – to a simple average of 25% of portfolio assets.