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Alt Fund Selection Is a Growing Challenge for Institutional Investors

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Alternative assets continue to be a crucial part of many institutional investors’ portfolios, but investors are now having a harder time identifying attractive investment opportunities compared to a year ago, alternatives data provider Preqin reported Thursday.

A record-high number of private capital funds and hedge funds are in the market, but 57% of real estate and 54% of infrastructure investors said they were challenged to find the right fund. Slightly less than half of private equity and hedge fund investors said the same thing.

Preqin’s latest survey involved in-depth interviews with 490 institutional investors across the globe, 36% of whom were located in North America, 33% in Europe, 21% in Asia/Pacific and 4% in the rest of the world.

Private capital investors in the survey generally felt the balance of power with their fund manager was tilting toward them. However, they viewed certain aspects of the fund selection and marketing process unfavorably.

Fund terms were a particular bugbear of investors. Some 80% across all asset classes said they had previously declined to invest in a fund because of the proposed terms, and more than a quarter said they frequently decided not to invest.

Survey participants also said firms had to work harder when promoting their funds. More than a third of investors across all alternatives reported that fund marketing documents commonly failed to meet their needs.

“These issues seem to be present across all asset classes, and serve to illustrate the challenges investors face in committing to vehicles,” Preqin Chief Executive Mark O’Hare said in a statement.

“Although more investors believe that the dynamic is shifting in their favor than against them, managers must ensure that they maintain open and effective communication during the fundraising process.”

Other Key Findings

Seventy-nine percent of investors surveyed, including 88% of those managing $1 billion or more, reported participation in at least one alternative class, while 47% said they invested in at least three classes.

The report showed hedge funds are up against the ropes. For the first time, Preqin said, more investors intended to reduce than increase their allocation in the long term, 33% vs. 17%.

In contrast, private debt and private equity can expect growth, as 67% and 56% of investors, respectively, said they planned to increase their investments.

Not all the news for hedge funds was bad. Twenty-nine percent of investors reported target allocations to hedge funds of 20% or more of their assets, by far the highest proportion of any alternative asset class.

Infrastructure allocation paled in comparison, as 49% of investors said they had less than 5% of their assets in the class.

Private equity had the most positive image among institutional investors, with 71% of survey participants viewing it favorably. Private debt followed, with 61% holding a positive opinion.

At the same time, 46% of investors said they were unhappy with hedge funds, and 25% felt that way about natural resources.

Performance matters. Just 11% of investors said their investments in private equity, infrastructure or real estate had failed to meet their expectations. Thirty-six percent of real investors said their performance objectives had been exceeded, the highest proportion of any asset class.

Hedge funds, in contrast, failed to meet the expectations of 79% of investors. Just 15% percent said their expectations had been met and 6% exceeded by their hedge fund investments.

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