Institutional investors are preparing for increased volatility in public markets by increasing allocations towards alternatives, according to new research.
A study by Carne Group of 200 senior leaders at pension funds, insurers and other institutions found that hedge funds were the most popular alternative asset class when seeking refuge from listed market volatility, with two third of investors expecting them to attract strong inflows over the next five years.
A majority of investors (67%) anticipate increased stock market volatility in 2024, Carne Group’s research found, with 6% bracing for a “dramatic increase”.
However, 88% of respondents indicated a higher risk appetite for 2024, reflected in the preference for alternative assets.
“Sustained volatility and the hunt for higher returns have pushed investors towards alternatives,” said John Donohoe, CEO at Carne Group. “These assets typically exhibit lower correlation to market movements, offering valuable diversification and potentially meeting regulatory requirements.”
Nine in 10 pension funds (92%) said they expected an increased risk appetite this year, with 6% anticipating a significant rise. A similar proportion of consultant respondents said the same, with 96% expecting a higher risk appetite and 13% predicting a significant rise.
Hedge funds back in vogue?
Hedge funds were the most favoured alternative asset class, with 65% of investors ranking them among the top three for expected inflows over the next five years.
The sector has endured a difficult decade, with several large public pension funds in different countries exiting the asset class, often citing poor returns and high fees. However, data from private markets specialist Preqin shows that hedge funds performed relatively well in tricky conditions through 2023, and may be starting to attract investor attention again.
However, Preqin’s Charles McGrath said in December that fudnraising pressures for hedge fund managers may continue in the short term.
He said: “Hedge funds are going through significant changes. Even as they showed how they can help the larger portfolio, investors still do not seem comfortable with the asset class, as many are pulling capital out of hedge funds at a higher rate than they are committing capital.
“Industry-wide outflows will continue, but it will not be uniform. Top performers will stand above the fray. While some outflow numbers are glaring, North America is growing as a stronghold for the asset class and will continue to do so.”
Private equity and debt
Elsewhere in the Carne Group research, venture capital (57%) and private equity (56%) were also expected to bring in strong inflows over the next five years. Renewable energy (55%) was also gaining traction among respondents, reflecting growing interest in sustainable investments.
Nearly one in three (30%) of investors said they planned to increase allocations to private debt, which Carne Group said highlighted strong interest among asset allocators.
“The focus on alternatives isn’t short-lived,” said Carne Group’s Donohoe. “Our research suggests a strategic shift towards diversification and potentially higher returns, with private debt poised for significant growth.”