Key Takeaways
- • European liquid alternative assets under management stood at EUR356 billion (USD431 billion) at the end of September 2020, a 15% decline from the start of the year, according to Cerulli Associates.
- • Net outflows exceeded EUR21 billion year-to-date in 2020, though withdrawals slowed to EUR1 billion in the third quarter; Cerulli expects flows to be negative for a second consecutive year in 2020.
- • Cerulli expects demand to recover over the medium term, driven by greater transparency, falling fees, and the promise of uncorrelated returns as investors diversify portfolios.
- • Cerulli advises managers to review and close underperforming liquid alternative funds, integrate ESG factors, and prepare for fee concessions.
- • Demand for liquid alternative funds focused on real assets is rising, with private banks and wealth managers expected to be key sources of interest.
Summary
The short-term outlook for liquid alternatives in Europe remains pessimistic, according to the latest issue of The Cerulli Edge—Global Edition. Andrius Dovydavicius, research analyst with the European institutional team at Cerulli Associates, said net new flows into liquid alternatives in Europe will likely be negative for a second consecutive year in 2020, although outflows are expected to moderate in the latter part of the year.
European liquid alternative assets under management stood at EUR356 billion (USD431 billion) at the end of September 2020, a 15% decrease from the beginning of the year. Net outflows exceeded EUR21 billion for the year, although withdrawals declined significantly to EUR1 billion during the third quarter. On average, liquid alternatives outperformed traditional investments during March's bear market, but the quick market recovery left them lagging traditional investments in performance.
Cerulli nonetheless expects demand to strengthen over the medium term. The firm cites greater transparency, falling fee levels, and the promise of uncorrelated returns as drivers, as investors diversify portfolios. The COVID-19 crisis is also expected to create market dislocations that present opportunities for liquid alternative managers. Interest in private assets is driving traction for liquid alternative funds focused on real assets, with demand likely from private banks and wealth management firms.
Cerulli advises managers to reassess their product shelves, closing funds that have failed to deliver value and incorporating ESG factors into their investment process, noting ESG liquid alternative funds have fared better than the overall industry. Dovydavicius said: "We believe that the sector will stabilise. However, managers will need to adapt to asset allocators' shifting preferences to succeed."
European managers have improved investor relations and institutionalised operations since the Global Financial Crisis, but further adaptation is needed. According to the Alternative Investment Management Association, 53% of European managers are looking to optimise their use of digital tools, and 22% are seeking to enhance transparency and risk reporting of underlying funds. Cerulli research also found that 23% of European institutional investors expected to negotiate higher management or performance fee discounts for their hedge fund investments in 2019, so managers should be prepared to offer fee concessions.
European liquid alternative assets under management stood at EUR356 billion (USD431 billion) at the end of September 2020, a 15% decrease from the beginning of the year. Net outflows exceeded EUR21 billion for the year, although withdrawals declined significantly to EUR1 billion during the third quarter. On average, liquid alternatives outperformed traditional investments during March's bear market, but the quick market recovery left them lagging traditional investments in performance.
Cerulli nonetheless expects demand to strengthen over the medium term. The firm cites greater transparency, falling fee levels, and the promise of uncorrelated returns as drivers, as investors diversify portfolios. The COVID-19 crisis is also expected to create market dislocations that present opportunities for liquid alternative managers. Interest in private assets is driving traction for liquid alternative funds focused on real assets, with demand likely from private banks and wealth management firms.
Cerulli advises managers to reassess their product shelves, closing funds that have failed to deliver value and incorporating ESG factors into their investment process, noting ESG liquid alternative funds have fared better than the overall industry. Dovydavicius said: "We believe that the sector will stabilise. However, managers will need to adapt to asset allocators' shifting preferences to succeed."
European managers have improved investor relations and institutionalised operations since the Global Financial Crisis, but further adaptation is needed. According to the Alternative Investment Management Association, 53% of European managers are looking to optimise their use of digital tools, and 22% are seeking to enhance transparency and risk reporting of underlying funds. Cerulli research also found that 23% of European institutional investors expected to negotiate higher management or performance fee discounts for their hedge fund investments in 2019, so managers should be prepared to offer fee concessions.
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