Key Takeaways
- • Alternative Investment Funds (AIFs) have expanded significantly globally, with European AIF assets reaching €5.8 trillion in net asset value (NAV) by end-2018, a 11% increase from 2017, while U.S. hedge fund assets grew from $1.9 trillion in December 2013 to approximately $3.6 trillion by May 2018, with the U.S. accounting for 72% of global hedge fund assets.
- • AIFs serve primarily institutional investors—including large pension funds, endowments, and family offices—though retail investors represent a significant 16% of total European AIF NAV, predominantly through funds of funds and real estate funds.
- • Fund financing through subscription credit facilities has expanded alongside AIF growth, enabling managers to fund near-term expenditures with loans repaid through investor drawdowns, raising credit risk concerns among industry experts given the scale of leverage accumulation since the 2008-2009 financial crisis.
- • Creditworthiness of AIFs is fundamentally tied to underlying investments, trading strategies employed, and fund-level financing structures, making comprehensive credit risk assessment essential for lenders and investors.
- • S&P Global's three-part series addresses critical gaps in AIF credit analysis, including fund financing mechanics, identification of key credit risk factors, and development of assessment methodologies for evaluating AIF creditworthiness.
Summary
Alternative Investment Funds have experienced substantial growth as institutional capital continues to flow into hedge funds, private equity, and other non-traditional asset classes. Between 2003 and 2018, alternative investments globally doubled their market share. In Europe specifically, the AIF universe expanded to €5.8 trillion in NAV by the end of 2018, representing an 11% increase over 2017, with this expansion driven primarily by new fund launches rather than valuation appreciation. The U.S. remains the dominant market for hedge funds, accounting for 72% of approximately $3.6 trillion in global hedge fund assets as of May 2018, compared to $1.9 trillion as of December 2013.
The investor base for AIFs comprises predominantly large institutional investors such as pension funds, endowments, and family offices seeking exposure to alternative asset classes and higher risk-adjusted returns. However, retail participation in the European AIF market is notable, representing 16% of total NAV, with most retail capital concentrated in funds of funds and real estate vehicles.
Parallel to AIF growth, fund financing—particularly subscription credit facilities—has expanded quietly but steadily. Subscription financing enables AIF managers to access capital for near-term operational needs and investments, with loans subsequently repaid through investor capital drawdowns. This financing mechanism has drawn scrutiny from industry experts concerned about the cumulative leverage in the alternative investment sector, particularly given institutional memory of the 2008-2009 financial crisis. The expansion of fund-level borrowing introduces credit risk considerations that extend beyond individual fund performance to encompass structural funding vulnerabilities.
S&P Global's analysis establishes that AIF creditworthiness is intrinsically linked to three core factors: the quality and performance of underlying investments, the trading and operational strategies employed by fund managers, and the structure and terms of fund-level financing arrangements. A comprehensive three-part series is designed to equip investors and lenders with frameworks for assessing these credit dimensions, addressing a critical information gap in the evaluation of AIF credit risk.
The investor base for AIFs comprises predominantly large institutional investors such as pension funds, endowments, and family offices seeking exposure to alternative asset classes and higher risk-adjusted returns. However, retail participation in the European AIF market is notable, representing 16% of total NAV, with most retail capital concentrated in funds of funds and real estate vehicles.
Parallel to AIF growth, fund financing—particularly subscription credit facilities—has expanded quietly but steadily. Subscription financing enables AIF managers to access capital for near-term operational needs and investments, with loans subsequently repaid through investor capital drawdowns. This financing mechanism has drawn scrutiny from industry experts concerned about the cumulative leverage in the alternative investment sector, particularly given institutional memory of the 2008-2009 financial crisis. The expansion of fund-level borrowing introduces credit risk considerations that extend beyond individual fund performance to encompass structural funding vulnerabilities.
S&P Global's analysis establishes that AIF creditworthiness is intrinsically linked to three core factors: the quality and performance of underlying investments, the trading and operational strategies employed by fund managers, and the structure and terms of fund-level financing arrangements. A comprehensive three-part series is designed to equip investors and lenders with frameworks for assessing these credit dimensions, addressing a critical information gap in the evaluation of AIF credit risk.
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