Survey shows institutional investors plan to more than double their investments
The next frontier in institutional investment may be liquid alternative ETFs.
The investment vehicles deliver exposure to alternative asset classes with daily liquidity and include closed-end funds, mutual funds and ETFs.
Institutional investments in the funds are set to more than double over the next 12 months, as interest in alternative asset classes intensifies, according to a survey from Greenwich Associates.
An increase in these investments has been rising since the financial crisis following liquidity issues which were caused partly by relatively long lock-up periods.
“For more than 20 years, institutional investors have been adding alternative asset classes to their portfolios. More recently, institutions have been adopting exchange-traded funds (ETFs) as a versatile, jack-of-all-trades portfolio tool,” explains Andrew McCollum, Greenwich Associates Managing Director and author of Liquid Alternative ETFs: The Next Frontier in Institutional Investing. “The intersection of these trends could ultimately bring about a transformation of alternative investments in institutional portfolios.”
The doubling of Liquid Alternative ETFs comes from a relatively small base; currently they make up about 4% of institutional investments.
In the US these allocations represent $882 billion in institutional assets currently invested in liquid alts, including $564 billion from public funds. Public pension funds have the largest share (around 6%) while corporate funds and outsourced investment management have the smallest (around 2%).
Growing allocations
Although for most institutions, these funds are new and novel, those allocating to them will typically commit around 3% of total assets.
However, Greenwich says that investors tend to start small with ETFs and build their allocations once they find that the are generally safe, effective, and flexible.
The firm’s survey found that 20% of institutional investors that are not currently using liquid alt ETFs will consider doing so within the next year; and 1 in 10 that are already investing plan to increase their holdings in the next year.
“Given institutions’ embrace of ETFs in other asset classes and their ample appetite for alternatives, it’s possible—even likely—that large numbers of these investors will experiment with liquid alt ETFs when given an opportunity and that allocations and total investment will rise steadily for the foreseeable future,” added McCollum.
*New* Liquid Alternative ETFs: The Next Frontier in Institutional Investing https://t.co/VkOnzq2dcy via @GreenwichAssoc by #AndrewMcCollum pic.twitter.com/EVqGX9W0uh
— Greenwich Associates (@GreenwichAssoc) November 4, 2019
