(Reuters) – Hedge funds, private equity funds and other alternative investments will command up to 40 percent of the asset management industry’s global revenues by 2020 as investors seek them for safety and consistent returns, consulting firm McKinsey & Co said on Wednesday.
Alternatives represent one of the biggest growth opportunities of the next five years and will amass that chunk of revenues while accounting for just 15 percent of the entire asset management industry’s assets worldwide, McKinsey said in a report titled “The Trillion-Dollar Convergence: Capturing the Next Wave of Growth in Alternative Investments.”
Alternatives that are marketed to mom-and-pop investors will remain red-hot, with new cash flows into these funds driving up to 50 percent of the net new retail revenues that U.S. retail asset managers will make over the next five years, the report said.
Investors seek alternatives, which may invest in assets such as timber or real estate or use tactics such as betting against securities, for so-called “uncorrelated” returns that do not move in tandem with conventional stock and bond markets. Fears of a downturn in stock or bond markets have been known to trigger demand for alternatives.
Alternatives will account for a big chunk of revenues by 2020 given their fees, said Ju-Hon Kwek, an associate principal at McKinsey and one of the report’s authors. Alternatives typically charge higher management fees than conventional funds, while hedge funds and private equity funds also charge additional performance fees.
Global assets in alternatives hit a record high of US$7.2 trillion in 2013 and currently generate nearly 30 percent of the asset management industry’s revenues, the report said. Retail alternatives, including in mutual fund, closed-end fund and exchange-traded fund formats, have about US$2 trillion in assets globally, with U.S. retail alternatives accounting for nearly US$900 billion of that sum, the report said.
The report said some investors were seeking alternatives for their safety as an “insurance policy” against market volatility, while defined-benefit pension plans were seeking “higher-yielding alternatives” compared to traditional stocks and bonds to meet investment goals.
The report said alternatives were a “crucial source of industry flows and revenues” and that net flows into the alternatives market globally will grow at an average annual rate of 5 percent over the next five years, far above the 1 percent to 2 percent expected annual rate for the asset management industry as a whole.
The McKinsey report drew on findings from the firm’s 2013-2014 Alternative Investment Survey, which polled nearly 300 institutional investors managing US$2.7 trillion in assets and interviewed over 50 investors.
(Reporting by Sam Forgione; Editing by Tom Brown and W Simon)
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