Vidrio Attends ALTSUK for Insights on the Allocator Landscape

Vidrio Attends ALTSUK for Insights on the Allocator Landscape
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To stay ahead in alternative investment trends, attending key events that address current issues affecting various allocators is essential. Vidrio recently participated in the ALTSUK event to gain deeper insights into portfolio construction, private credit strategies, governance, and more. Check out our latest blog by Nick Bourne.

By: Nick Bourne, Commercial Director, EMEA

Recently, Vidrio Financial unveiled an industry calendar designed to identify key events that we will be attending over the next several months. One of these events, ALTSUK, took center stage in September, offering institutional investors insights on the trends impacting their asset allocation strategies, especially in alternatives.

Throughout the day, I heard thought-provoking panel discussions and networking sessions focused on institutional portfolio construction, private credit strategies, allocator governance, and market volatility.

Institutional Portfolio Construction and Allocations

Vidrio clients are in constant pursuit of the perfect balance between diversification and high returns, as they navigate the complex world of alternative allocation strategies amidst challenging factors like geopolitics and inflation. At the forefront of this conversation was a panel titled, "Portfolio Construction – Finding Opportunities in the Current Landscape," featuring valuable insights from Joe McDonnell, CFA, Chief Investment Officer at Border to Coast, William Hobbs, CAIA, Head of UK Multi-Asset Wealth at Barclays Private Bank & Wealth Management, Jennifer Bishop, CFA, Deputy Chief Investment Officer and Head of Responsible Investment at Coal Pension Trustees, Christopher Carrano, Vice President of Strategic Research at Venn by Two Sigma, and Michael Elio, Partner at StepStone. The session was expertly moderated by Laura Merlini, CAIA, Managing Director, EMEA, at the CAIA Association.

The theme of the total portfolio approach (TPA) or view, was a recurring theme debated in this session, starting from Stepstone who held the belief that TPA is ideal to have, but harder to implement in the real world. Border to Coast and the Coal Pension Trustees both thought that the breaking down of silos is critical when it comes to reporting on public and private market allocations. Border to Coast is an open scheme with 85% in risk assets and 15% in fixed income. In the last five years, they have allocated around £16.5 bn to alternative investments. This allocation strategy may have been a lot more challenging without a disciplined TPA . Through a dedicated TPA portfolio strategy, they were able to diversify into other themes, like climate transition and broader ESG investments.

Stepstone did agree that data is crucial in their investments with qualitative being as important as quantitative when selecting external managers. Border to Coast also supported this sentiment especially as asset class lines are blurring. They are looking for growth and patiently reviewing investments in climate, healthcare, and other industries. Border to Coast looks for niche opportunities and speaks to a lot of managers to gain additional intelligence.

Vidrio approaches TPA by unifying all investment data on a single platform providing investors with near real time intelligence across hedge funds, liquid alts, private market allocations. This connected well with the above points on blurring the lines in asset allocations and breaking down internal silos in order to gain greater portfolio clarity.

Vidrio Financial Asset Owner Lens Platform

Building Major Asset Owners

In the world of finance, it’s rare to find allocators who wear two hats, one as an asset manager and the second as an asset owner. However, these dual-duty professionals exist, though they are few and far between. Our Improving Alpha podcast featured a dual allocator recently. To compare investment styles from one dual allocator to another, we encourage you to listen to our podcast featuring the CIO of Mount Sinai’s Endowment.

The Keynote with Michelle Ostermann. CEO of the Pension Protection Fund (PPF), being interviewed by William (Bill) Kelly, CAIA, Chief Executive Officer, CAIA Association, gave an overview of the PPF, touching on the £32bn AUM, across 350,000 members, and their current (60%) allocation to alternatives. The PPF is both an insurer and pension fund, backstopping 5,000 defined benefit schemes across the UK. The easy way to think about this is that when a corporation goes bust, the DB pension fund is taken over by the PPF. Their model is to take on risk to outperform and plug any gaps in the pension schemes that they oversee.

The keynote then shifted with Bill asking Michelle what she believes are the correct steps to build a serious asset owner for today’s market. Instinctively, she highlighted three key pillars:

1. Governance: Asset owners’ shoulder fiduciary obligations, and they need to consolidate both assets and administration responsibilities. They must operate by maintaining independence from government entities. For more on governance strategies, be sure to check out the latest Improving Alpha podcast featuring Shivaram Rajgopal and his thoughts on combating disengagement and zombie investments that allocators might miss.

2. Scale: A robust 60% of the PPF portfolio, is allocated to alternative investments spread across six diverse categories, with private markets aligning most effectively with their liabilities.

3. Sophistication: investment and risk need to be properly managed; a similar level of sophistication is needed as a hedge fund manager.

Michele concluded that alternative investing would play a much larger role in the future of the PPF. Risk is part of the business model and they have a role to play as patient capital in the economy.

The Landscape

In today's ever-evolving economic landscape, shaped by factors such as geopolitical tensions, higher structural inflation, fluctuating interest rates, and the rapid rise of AI, asset allocators are rethinking their strategies. At Vidrio, we've engaged with clients and prospects to craft cutting-edge methodologies that empower allocators to revolutionize their data management, enhance risk modeling, and streamline portfolio reporting.

The keynote panel entitled Global Macro Impacts on Asset Allocation, featured John Normand, Head of Investment Strategy, AustralianSuper, Max Townshend, Investment Director & Head of Investment Strategy, Local Pensions Partnership Investments, Beatrice Atena Stanoescu, Head of Alternative Investments Research, XPS Pensions Group, Constantine Rinn, CFA, Head of Investment Advisory, UBS, and was moderated by Oliver Jones, Head of Asset Allocation, Rathbones. Panelists immediately weighed in on inflation, stating that growth across the UK will be slow to moderate with inflation sticking around a bit longer. Asset mix varied among the panelists given these macro-economic forces with the following reporting:

A view of Australian Super and XPS Pension Plan per ALTS UK - Vidrio Financial

The Local Pensions Partnership Investments didn’t specify percentages, but they did state that there has been a drift into real assets from private equity and real estate. UBS added that private clients want superior returns, with the typical client having an average of 33% set in alternative asset classes. AustralianSuper agreed that infrastructure demand is on the rise and investors should see more allocations in the future. UBS is seeing investment activity in hedge funds, long/short strategies, UCITs, and a small allocation in CTAs.

AI as an investment theme is being tested, but transparency on how it can impact the bottom line for small and mid-caps is still in question.

Private Credit Opportunities

Vidrio has been covering private credit movements among allocators as it provides a good diversification strategy, performance, and a way for allocators to get direct exposure by lending themselves or investing in funds that pursue private credit strategies.

In the session, Opportunities in Private Credit for Portfolio Diversification featuring Josh Shipley, CFA, Executive Managing Director, PGIM Private Capital, Joe Tolen, CAIA, Senior Investment Director - Credit Investment Group, Cambridge Associates, Wouter Van Assche, Portfolio Manager, Manulife | CQS Investment Management, Cecile Retaureau, Head of Private Markets, Phoenix Group, moderated by Veronica Bateman, Managing Director – Private Credit, Aksia, the panel agreed that displacing banks in corporations’ capital structures is a huge opportunity for private credit players.

Cambridge Associates highlighted the vast array of alternative credit strategies available today, noting that not all are the best fit for institutional investors. This makes comprehensive due diligence essential. At Vidrio, our recent media interactions have affirmed that private credit is experiencing explosive growth, with the potential to outpace private equity in both size and returns. This trend aligns with industry experts' perspectives as the rising demand fuels increased market supply.

Private Equity in Focus

After exploring the Opportunities in Private Credit for Portfolio Diversification session, I eagerly wanted to listen to the perspectives for private equity. Featured expertise came from Raphael Drescher, Group Head of Alternatives and Direct Investments, Quintet Private Bank, Daniel Kylander, Investment Analyst - Private Equity, Church Commissioners for England, Holly Murnieks, Senior Director, Investments, Willis Towers Watson, and Karen Nes, CFA, Associate Portfolio Manager, Aware Super and was moderated by Joe Basrawy, Managing Director, Partners Capital.

Allocators are seeing private equity exits increase from 5 years to 7 years. On the flip side, many high-net-worth individuals are actively seeking diversification, which they believe can only be achieved through private market investment. AwareSuper is reviewing its allocation to private equity due to underperformance over the last 2 years. The Church Commissioners for England mentioned that liquidity is getting harder to find, they find specialist managers focused on a given region or industry. Industry sectors that appear to be of interest from this session for future allocator investment include financial services, industrials, US sports – both teams and leagues, and e-gaming. Unlike the Global Macros impact session, where AI was highlighted as an investment theme, this time around innovative technology was on the sidelines.

According to the American Investment Council, private equity investments have been some of the best performers for pension funds over 10 years, with a median annualized return of 15.2%. Although cracks are starting to show in monetizing these investments, with PE returns slowing, we believe that the private equity illiquidity premium for some allocators may have been mispriced or miscounted for, leading to an overallocation in asset portfolios. Vidrio believes that PE declines are just a short-term blip and looks like a trend for the next few years.

In a smaller but still relevant panel to the private equity session titled Alternative Alts – Finding the Right Niche Investment Opportunities for your Portfolio, additional niche sectors were highlighted as typically outperforming traditional areas of investments. Sector insights came from Chris Heller, Co-Founder & Co-Managing Partner, Cordillera Investment Partners, and Agustin “Gus” Araya, Co-Founder & Co-Managing Partner, Cordillera Investment Partners, and was moderated by Antonio Curia, Founder and Managing Director, Miele Private Office. According to Antonio, caution needs to be taken when investing in these niches, as there are too many "cowboys", lacking the deeper knowledge that is required for returning alpha. Cordillera Investment Partners pointed to whiskey aging and carbon markets as successful niche plays. Whiskey investing can best be classified as a “passion investment” which has direct links to investor hobbies and interests, per a recent article in WealthBriefing. According to Cordillera Investment Partners, they ideally want zero correlation with listed equities, (i.e. maximum diversification from traditional assets).

Hedge Funds and Solutions Based Investing

Are hedge fund strategies done for the year? Will hedge funds regroup for 2025, even though through this ALTSUK event, more allocators are favoring the push to private market strategies? The final session that we attended was Hedge Funds: Downturn Protection through Solution Based Investing featuring insights from Matthew Towsey, CAIA, Partner, Co-Head of Hedge Funds and Liquid Alternatives, Aon; Penny Aitken, European Head of Diversifying Alternatives Research, Mercer; Christopher Reeve, Director of Risk, Aspect Capital; and moderated by Brian Payne, CFA, CAIA, Chief Strategist, Private Markets & Alternatives, BCA Research.

Panelists agreed that hedge fund strategies are here to stay as a way for portfolios to balance risk and manage any potential equity crisis; however, investors should be aware that manager selection and due diligence are key.

Vidrio builds customized due diligence processes inside our platform that can be used during each manager selection to monitor and score non-quantitative aspects of their performance. These can be set and triggered automatically to alert investors to any guideline violations in their asset allocations. As an investor’s roster of managers expands, they can track individual manager data points and document them for future reference. Case examples of this benefit may include:

a. If a fund manager has exposures to certain restricted sectors, regions, or positions. An alert would be sent to the CIO or portfolio manager for a triggered due diligence workflow.

b. If the fund manager has a loss greater than a fixed amount or an amount relative to a benchmark, or the volatility greater than a certain fixed or relative amount. This would trigger a due diligence process.

These rules inside the Vidrio platform help our clients manage hundreds of managers within their portfolios.

During the discussion, Aon shared that clients want increased liquidity. Paper profits are no good when you need to raise cash. From Aon’s standpoint, clients need to be able to exit their positions when they want to settle other liabilities and then re-up to prepare for any crisis by having downside protection against equities. Since they look at a rolling 3-year return rate, clients need to be patient.

The conversation then switched to the topic of fees. Panelists agreed that the “2 and 20” rule where fund managers charge a 2% management fee and then receive an incentive of 20% of the profits is dead. Instead, Mercer suggested that the most important factors when negotiating fees are demand, supply, and quality. As the demand and quality of these investment funds rise, fees will be tougher to negotiate, as long as performance holds. Under supply, other criteria can drive the fee structure. Is the fund only open to certain investors, is there a cap on the amount of investors, or does a deadline exist? Aon also noted that UK pension funds want lower fees. If you’re providing seed capital, the investor expects better fees, even for spin-out hedge funds. The average range falls now between 75-200 bps for management fees, and for performance, it can be anywhere from 0-20%. Pod shop fees are very high, with expenses passed through to the investor that are not traditionally counted as fees. Vidrio tracks fees through the onboarding of fund terms by describing rates across both performance and management. Other non-fee costs can be entered as transactions to show performance after all costs.

Fund Terms Fees - Vidrio Platform

I enjoyed the time spent at the ALTSUK event, which was in conjunction with the CAIA Association, as there were tremendous insights on how the UK market is navigating geopolitical risks, inflation, and more. The ideas shared on portfolio construction, governance, asset allocation strategies, private markets, and hedge funds aligned well with Vidrio’s roadmap over the next 12-18 months. If you’re an institutional investor looking to understand how Vidrio can seamlessly integrate with your business to help improve data collection, risk monitoring, and allocation performance, please reach out.

Book a meeting with Nick today to experience a complimentary walkthrough of Vidrio’s latest platform. Remember, with Vidrio we scale with your business and are constantly improving our software and services for front, middle, and back-office operations.

Nick Bourne
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Nick Bourne

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