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How alternative investments are going mainstream

Almost given up for dead during the crisis, they have fully recovered and are set to outpace traditional assets over the next few years.

September 2012

The financial crisis seemed to mark a turning point in the spectacular growth of alternative investments, such as managed investments in hedge funds, private equity, real estate, commodities, and infrastructure. Poor performance and liquidity problems led to massive redemptions in several categories. By now, however, those problems have subsided, and alternatives are back on track. Globally, alternative assets under management more than doubled between year-end 2005 and year-end 2011, to $6.5 trillion. This pace represents a compounded annual growth rate of 14 percent over the period, far outstripping traditional asset classes.

To gain perspective on this rapidly changing business, McKinsey has for the past few years undertaken a research effort in partnership with Institutional Investor. Our most recent report, The Mainstreaming of Alternative Investments, presents the highlights of the 2011 Global Survey on Institutional Investing. They include:

  • The recent surge in alternative investments looks set to continue. Institutional investors currently have about $24 trillion under management globally (excluding defined contribution). These investors expect that by year-end 2013, their allocations to alternatives will hit 25 percent, up from 23 percent in 2011.

  • Investment behavior is diverging. Smaller, less experienced institutions are staying the course with diversified multi-asset-class funds of funds. Larger, more sophisticated institutional investors increasingly put their money directly in hedge funds or are bringing management in-house.

  • Alternatives are moving quickly into retail investment portfolios (exhibit). By 2015, retail alternative investments are expected to account for one-quarter of revenues and a majority of revenue growth.

Exhibit

Alternative investments are experiencing strong growth in the retail market, particularly in US mutual funds.

To get ready for this burst of growth, most traditional asset managers we surveyed agree that they need to ramp up their risk-management skills and product expertise and to make some changes in their sales processes and incentives. Managers specializing in alternatives say that they too must prepare—mainly by adding customer-centric capabilities to their strengths in generating market-beating results.

Download the full report, The Mainstreaming of Alternative Investments: Fueling the Next Wave of Growth in Asset Management (PDF 756 KB).

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