Consulting firm Casey Quirk released its annual “Consultant Search Forecast” earlier today. The report is based on a survey of 64 investment consultants conducted in the fall (post-Lehman, pre-Madoff) by Casey Quirk and manager database provider evestment Alliance.
This year’s report contains some notable difference from previous years. For starters, hedge funds have dropped from being a high “interest” and high “search focus” to being kind of average (chart below from report).
Taking their place at the top of the heap as generating the highest interest are traditional investments which were listed as “a takeaway game” last year and “nice and steady” in 2007.
2007 and 2008 comparable charts:
So whither alternatives? According to Casey Quirk, it sounds like they have been given more of a paid leave of absence rather than an outright pink slip. Writes the firm:
“Interest in such products surged in 2008, but consultants expect it to recede in 2009. Volatile markets have cooled, but not frozen, demand for alternative investments, as institutional investors re-assess their policy decisions about hedge funds, private equity and real estate. Pensions, in particular, are starting to re-examine the role hedge funds may play in meeting looming unfunded liabilities, as well as the way such investments are used-whether they are designed to generate equity-like or bond-like returns, for example.”
They’re not joking when they say red hot interest in alternatives will “recede” this year. As the chart below from the report shows, about 25% of consultants thought there would be a “significant” amount of hedge fund search activity this year – vs. a whopping 69% last year.
Although the search for new hedge fund managers may wane this year, Casey Quirk says that institutional investors (particularly of the US variety) will likely avoid reducing their allocations:
“…most consultants do not expect a wholesale redemption from hedge funds, especially given that most US institutional investors were fortunate enough to avoid exposure to spectacular meltdowns such as Madoff. Respondents specializing in alternative investments, however, point out that a number of clients are overhauling manager rosters in their hedge fund portfolios.”
The numbers back this up, as 53% of respondents said that institutions would undergo “little or no redemptions” and only 5% expected “strong redemptions.”
After all the negative press about funds of hedge funds, you’d think that institutions would be dumping them in droves. Not so. In fact, the proportion of respondents that said they expected to see a preference for funds of funds actually went up dramatically – from just over 40% to 65%.
And strangely, the proportion of respondents who said they expected to see a “strong” preference for single managers also went up (from around 10% to around 15%).
It seems that the events of 2008 will get many investors off the fence. Last year around 35% said they had “no preference” for either funds of funds or single managers. This year, that number is only about 10%.
Traditional manager search activity will always outstrip alternative manager search activity since traditional investments are likely to remain the bread and butter of most portfolios. So it’s difficult to compare the level of interest in hedge funds to the level of interest in domestic equity, for example. But regardless of the relative change in assets, traditional investments have certainly been placed in “priority sequence”, as they say when you’re on hold, by the investment consulting community.