Fresh off the ALTS LA event, the Vidrio team breaks down some key takeaways on the minds of today's allocators.
By: David Barry, Director of Marketing, Vidrio Financial
Earlier this week, Vidrio Financial was excited to participate in the ALTS Los Angeles, (ALTSLA) event which took place on March 27-29th, where we heard from leading allocators across the alternative investment space. Throughout these discussions, there was a tremendous focus on the future of hedge fund allocations, market volatility and geopolitical tensions, and the future of private credit and fixed income strategies. Let's get in to our takeaways from this event.
Keynote Panel and How Investors are Planning for the Future
At the end of January, Vidrio published a blog on the value of private credit and the movements away from a traditional 60/40 portfolio. During our time at ALTS LA, we heard from representatives from the San Diego County Employees Retirement System (SDCERA), PGIM Fixed Income, Employees Retirement Fund of the City of Dallas, and the Farmers Group that addressed these asset movements and more. One of the key takeaways from this session was the debate around hedge fund investing and whether there was value to allocators seeking greater diversification beyond the 60/40 portfolio split.
Most of the panelists agreed that hedge funds are still a necessity, despite the billions that investors have been pulling out, and rebalancing towards other asset classes. However, the devil is in the details as not all strategies are created equal. Panelists highlighted the fact that "multi-strat" (multi-strategy hedge funds) that combine various strategies to manage risk centrally, are one of the most attractive strategies that allocators can leverage today. However, challenges in accessing multi-strat hedge funds do exist, and include:
1. A lack of talent or portfolio managers and analysts that are staying in their current roles in hopes that their current organization will diversify into multi-strat options.
2. Many multi-strats are closed to new investors, and if allocators are able to access these types of strategies, the charges that get passed along to investors can cause severe cases of sticker shock for many.
3. As an alternative, it was suggested that investors could set up DIY multi-strats leveraging SMA investments across a bunch of hedge fund managers. However, this approach was deemed risky as institutional investors may not have the bandwidth to track risk and transparency to the degree that's required and seen at larger organizations like Citadel or Millenium. Thankfully there's a Vidrio Financial out there to assist with risk and transparency concerns on any multi-asset class strategy found today.
As we noted in the 2023 Investor Compendium, the Vidrio Financial take on hedge funds is dependent on the investor. Managers that can execute on strategies that play off the current volatility should continue to perform well, at least through the first half of the year. We further believe that convergence is accelerating, where managers will begin to offer a combination of investments incorporating strategies across hedge funds, co-investments, secondary's, private markets and everything in between.
The Private Credit Perspective
Back in December, Vidrio visited the ALTS MIA event (read about that experience here) and heard a lot across the conference about Crypto. Fast forward to ALTS LA, and the shiny new toy is clearly Private Credit strategies and future asset allocations. Many believe that private credit is valuable in any strategic asset allocation, while quite a few allocators also admitted they hadn't run full allocation studies in at least 5 years in order to determine if rebalancing was needed.
According to a recent McKinsey & Company report, private credit fundraising continues to rise thanks in part to fundraising drying up at larger banks, causing private lenders to fill the gap and provide financing for more than 80% of private equity transactions across the middle market. However, even with that sound bite many allocators at ALTS LA were unsure of next steps on how to counteract market forces like inflation, volatility, and overall risk in investments.
Separate from ALTS LA coverage, Ares Management Corp, recently noted the power of private credit. In the last five years, acting CEO, Michael Arougheti, has seen Ares profits compound at an annual rate of 35%, exceeding $1.1 Billion last year. Private Credit had a large role to play in that effort, and has allowed Ares to leverage the strength of that asset class into other alternative vehicles like infrastructure and real estate.
In a recent Bloomberg article, The University of California's investment fund, which manages ~$152 Billion, across retirement, endowment and cash assets, has stated it will shift its bets from hedge funds to a larger allocation in the private credit space. We at Vidrio believe that as these new allocation studies get completed across various allocators, the results for transparency, risk, cost savings and more will favor increase allocations to the private credit asset class.
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