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Research Outline

Prepared for Dan | Delivered June 18, 2020

Personas of Alternative Investment Managers

Goals

The research objective is to identify the fund or asset manager personas, which are expected to have a major impact on how managers have allocated alternative investment. The insights help improve the mutual understanding and relationship between investment managers and their clients.

Early Findings

  • With the increasing concern over environmental, social and governance (ESG) issues, institutional investors have started to incorporate ESG factors in the process of asset allocation and portfolio management. For example, in Canada, some of the large institutional investment firms have taken into account ESG factors as part of their commitment to the UN's principle of responsible investments. Investors have also seen ESG as one of their key selection criteria of asset managers. Moreover, diversify, inclusion and alignment of interests are also emerging themes in alternative investment.
  • In the private debt segment of alternative investment, experienced lenders tend to be cautious and focus on credit quality, while novice debt managers are expected to be volume-centric, prone to take risks and have inadequate attention to credit quality and exit strategies. For more information on the latest situation of alternative investment in Canada, please refer to the AIMA Handbank 2019.
  • Alternative investment managers tend to deploy sophisticated strategies and investment vehicles, untransparent tactics and debt, and invest in illiquid assets. This is partly because alternative investment has been less regulated than traditional asset classes, such as public equities, bonds and cash instruments.
  • In the future, some of the largest alternative investment firms are expected to focus on massive geographical and product expansion. Products and asset classes are expected to diversify into "hedge funds, private equity, credit, real estate, mezzanine and infrastructure." Sovereign investment fund tends to hire asset managers who are experts across asset classes, industry sectors and regions, which is expected to co-invest with alternative asset funds.
  • Risk and return characteristics are the primary aspects that asset managers are expected to look into when they select assets and asset classes. There has been a trend to shift portfolio weights from the public to private equities, as the latter was expected to outperform the former in terms of risk-adjusted returns in the long term. Moreover, a commingled private equity fund was expected to mitigate the risk of asset manager selection.
  •  Private equity fund managers are expected to generate above-average return performance, as they often invest in companies that have growth potential and they regularly create conditions for companies to grow. Private equity funds could have access to growth opportunities even under economic downturn, as they generally have more information and resources than fund managers that focus on public equities.
  • Depending on the hedging strategies and management styles, asset managers are expected to leverage their skills and experience in regions, industry sectors and instruments to allocate investment within alternative asset classes and for the entire investment portfolio that consists of traditional and alternative assets.
  • Fund or asset managers have deployed a persona-based client segmentation model that helps managers to gain a deeper understanding of clients' requirements, by understanding their needs, preference and behaviour-based variables. A better understanding of clients' circumstances allows asset or fund managers to align asset allocation strategies with clients' risk tolerance and return objectives. For example, based on clients' requirements, a hedge fund manager is expected to choose between a passive and a dynamic fund, or select a fund that enhances the efficiency of his or her entire investment portfolio.