McKinsey & Company
has some good news for all you alts newbies.
According to a presentation, that was probably the most popular data-driven set of slides at IIR's Liquid Alternative Strategies West
conference, Ju-Hon Kwek
, associate principal at the management consulting firm, said new, unrated (Morningstar
requires a three-year track record before issuing fund ratings) hedge fund strategy mutual funds attracted 41 percent of the flows, which was equivalent to $50 billion in net flows in 2013. This is according to preliminary data from McKinsey and Strategic Insight
. The rest of the money is distributed between 4-5 star funds, which are getting 59 percent of the flows, and 1-3 star funds that are getting 11 percent.
In the presentation, entitled "The Mainstreaming of Alternatives: Where do we stand today?" Kwek also shared some info about the growth of alternative strategies over time and their role in retail portfolios. Hedge funds have grown 10 times since 2005, with a sharp acceleration post financial crisis. Investment management is also going retail and alternatives could account for up to 25 percent of U.S. retail revenues by 2015, Kwek said. Some of the reasons for the growth spurt of alts include investors' disillusionment with traditional approaches, a need for goal-oriented investment portfolios, an evolution towards more sophisticated retail portfolio construction and accelerating demand among financial advisors.
Kwek thinks the mainstreaming of alts will happen in two acts. The first, which has already begun to occur, involves large traditional asset managers dominating the retail alternatives space. The second, he said, will be defined by a "trillion dollar convergence of business models," where institutional hedge funds, funds of funds, large asset management firms and mega alternatives firms will all come together to offer retail alternative products and pursue that client channel.
So far, a lot of the money in retail alternatives has been going to the larger, well-established flagship funds, though a subset of smaller funds have also gained some traction. Then there are many, what Kwek called "dabblers," who attempt to launch alternative retail products and never make a dent. "You shouldn't dabble in this space," Kwek said. The retail market isn't easy to get into, without a well established plan, brand and commitment, he added. "If you're going to dabble, you're never going to make it. You have to make a conscious decision to be here."
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