Investors in liquid alternatives target performance, liquidity and flexibility
Our Head of Alternative Investments shares his take on recent market evolutions and the rise in investor interest
Accelerating investments in liquid alternatives
Since 2010, the hedge fund investment market has grown exponentially. While only 5 years ago, its total value was already at USD 1.9 trillion, in 2015 its valued at USD 3 trillion! Part of this growth can be attributed to increased investment in liquid alternatives. Indeed, over the past 4 years, the assets under management (AuM) in liquid alternatives – whether UCITS in Europe or 40 Act funds in the US, grew 46.7% and 24.7% respectively.
In this short interview, Gilles Flament, Head of Alternative Investments at BNP Paribas Wealth Management, speaks about 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 and selects 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 the time, the market for liquid alternatives was poised for growth. The product was attracting investor interest not only because it is an avenue to different investment strategies, or thanks to the liquidity factor it represents, but its growth is also due to changes in global regulations, which provided access to this market. So, in March 2011, we rolled out our first set of client solutions.
What changes have paved the way for the emergence of liquid alternatives?
First and foremost, the global financial crisis drove demand towards more liquid investments. It was the turning point that made investors truly start looking for underlying safety and liquidity. Not to mention, the low interest rate environment combined with the high valuation of equities, also served as an impetus for investors to increase their allocation to alternative investments.
At the same time, regulatory developments related to UCITS and 40 Act funds have given access to liquid alternatives for all investors.
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 in tandem with greater liquidity and regulatory oversight.
What liquid alternative solutions do you offer?
We offer a range of more than 40 funds, mainly single funds, covering all types of liquid alternative strategies, such as long/short equity, equity market neutral, global macro, long/short credit….
Our suite of investments is currently built around US and European managers, some of which are well known, while others are 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.
What are the changes on the horizon for the industry?
Despite that market players and products are continually evolving, there is clearly a convergence of strategies and products.
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.
On the other hand, alternatives are moving into liquid products, previously associated with traditional long-only investments.
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 (i.e. daily and/or weekly). At the same time, they should be consistently capturing performance while limiting the downside.
Moreover, those fund managers who are now crossing over to liquid alternatives (and their numbers are rapidly increasing), are responsible for implementing their strategy while respecting the regulations governing UCITS and 40 Act funds.
So when I invest on behalf of our clients, I inquire very carefully into the advisability of the chosen techniques of every strategy and fund. 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 techniques; after all, our first consideration is always the best interest of the investor.
Equally important is investor education. As liquid alternatives become more accessible, the public needs to be better informed about the value added aspects and the characteristics of such products. Understanding the nuances between a liquid alternative and a traditional long-only product can be a challenge for investors, and any misconceptions can shake confidence in the industry. Because some alternative investments are liquid, it does not necessarily mean they have a simple strategy.
So there you have it: my take on the exciting new world of liquid alternatives.
But, in parting, I would like to take this opportunity observe that 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:
Gilles Flament
Head of Alternative Investments
BNP Paribas Wealth Management
gilles.flament@bnpparibas.com
Gilles, can you explain the role of your team?
Our team develops and selects 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.