Consultant Casey Quirk and database provider eVestment Alliance published their “2007 Consultant Search Forecast” last week. In a clear reaffirmation of our mission at AllAboutAlpha.com, the report listed portable alpha, liability-driven investing and 130/30 as “up and coming” while it listed hedge funds as “highest opportunity” (chart below):
As you can see, hedge funds weren’t alone in the “highest opportunity” category. Joining them were alpha-producing cousins private equity, real estate and international equity. Said the report:
“Over 50% of respondents mentioned Hedge Funds as one of their top search items for 2007. Fifty-six percent of respondents from firms advising less than $100 Billion and 33% of those advising more than $100 Billion plan to focus on Hedge Funds. In addition, 68% of consultants see an increase in Hedge Fund searches over 2006, and 25% of them see a significant increase in Hedge Fund searches. Surprisingly, not one of the consultants responding to the survey expects to conduct less Hedge Fund searches in 2007 than they did in 2006.”
We believe there are two possible explanations for this state of the world. Firstly, institutions think these asset classes will appreciate in the short/medium term. Or second, institutions think that now is a good time to jump off the beta bandwagon – at least partly – and shift assets to high-alpha-proportion investments. In other words, replace systematic risk with idiosyncratic risk.
While not yet “highest opportunity”, 130/30 is “up and coming” pretty fast. According to the study, big consultants expect a 60% increase in 130/30 (“1X0/X0”) searches while nearly 40% of smaller consulting firms surveyed expect such searches to rise this year (chart below).
Curiously, though, the data seems to suggest that LDI’s 2007 prospects are somewhat flat. Casey Quirk suggests this may be due to the fact that LDI is often categorized along with other asset classes (e.g. fixed income, hedge funds). We agree with this hypothesis since LDI is more of an approach than a “product”. In other words, an “LDI search” is often quite literally a search for fixed income and hedge funds. (Portable alpha is very similar – as we suggested in the recent Northwater posting).