Changes Ahead sign

Doubts about the longevity of the current bull market among institutional allocators and family offices are supporting a strong demand for alternative investment strategies, Context Capital Partners, an alternative investment specialist firm, reported Thursday.

Sixty-nine percent of these investors in a survey predicted that traditional equities and fixed income markets would underperform in 2018 compared with 2017, suggesting, Context said, that the cycle may be coming to an end.

In anticipation for a potential downturn, six in 10 investors reported they were reducing or hedging directional market exposure in equity or credit markets.

Seventy percent of respondents said they planned to increase their allocations to alternatives in 2018, and 29% planned to maintain their current allocations.

Context gathered responses from some 400 participants during its Context Summits Miami 2018, an annual gathering of fund managers and allocators for a series of one-on-one meetings.

“This survey was conducted immediately prior to a 10% drop in equities prices and a spike in market volatility, so it’s prescient that many institutional allocators were already planning significant allocations to alternative investment strategies, which offer investors the potential for downside protection as well as asymmetric returns that are uncorrelated to traditional market risks,” Ron Biscardi, Context’s co-founder and chief executive, said in a statement.

“We believe this strong demand for alternatives will continue as market participants adjust to the uncertainty ahead.”

Context noted that investors looking for strategies that offer the potential for a differentiated return stream are increasingly turning to cryptocurrencies and environmental, social and governance factors or impact-related strategies, two fast-growing sectors in the investment management industry.

However, the survey pointed up stark differences in attitude toward the two sectors among institutional allocators and family offices.

Although 63% of investors did not yet view ESG factors as a significant part of their overall investment philosophy, 51% said they expected to increase their allocations to ESG or impact-related funds in 2018 — evidence of the sector’s growing popularity, Context said.

In contrast, just 11% of allocators expected to add cryptocurrencies to their investment portfolios.

According to the survey, uncertainty surrounds the long-term investment merits of cryptocurrencies as 71% of respondents said they had no plans to invest in crypto-related funds and 18% were still undecided.

At the same time, investors expressed confusion and skepticism about the viability of crypto as an asset class: 27% called it a fraud, 27% said it was legitimate and the rest said they did not know.

To be sure, virtual currencies have attracted wide-ranging attention in recent months, much of it negative:

  • The Federal Trade Commission recently shut down promoters of deceptive cryptocurrency schemes
  • The Massachusetts securities regulator ordered five firms to halt the sale and promotion of unregistered securities in the form of virtual coin offerings
  • Lawmakers and cryptocurrency experts agree that regulators need to determine when a token is a commodity or a security
  • Earlier this month, an advisor and a quant discussed the future of cryptocurrencies in client portfolios.

Three in five investors in the Context survey said they preferred to allocate to emerging managers — defined as those with shorter than a three-year track record and/or less than $300 million in assets under management — while three-quarters said they looked for managers with at least three years of performance history.

The survey also revealed that the rise of the quants has slowed. Seventy-one percent of allocators said they had not replaced any of their hedge fund exposure with algorithmic or quantitative smart beta strategies.

“While current fiscal policy and robust economic growth remain a tailwind for risk assets, the recent uptick in market volatility, alongside the long-term shift in monetary policy, have created real reasons for concern among investors about their traditional market exposure,” Context’s chief investment officer, John Culbertson, said in the statement.

“The alternative asset management industry is well-positioned in the middle of these forces, providing institutional allocators and family offices with access to investment strategies that offer both diversification from traditional risk assets and the promise of a differentiated return profile.”