The Future of Money Management

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The Future of Money Management

As recently explained in the February 2015 McKinsey Quarterly, the boom in alternative investments presents something of a paradox. On the one hand, money has continued to pour into alternatives since 2010.1

Assets hit a record high of $7.2 trillion in 2013. The category more than doubled in size from 2005 to 2013, with global assets under management growing at an annualized pace of 10.7 percent; that's twice the rate of traditional investments.

Most notably, flows into alternatives were 6 percent of total assets in 2013, dwarfing the 1.5 percent of total assets that went into non-alternative investments. Every alternative asset category grew, especially direct hedge funds, real assets, and retail alternatives sold through registered vehicles, like mutual funds and exchange-traded funds (ETFs).

Even private equity, where assets had retreated from pre-crisis highs, has bounced back in its recent fundraising.

On the other hand, alternatives have enjoyed this growth at a time when their returns have generally lagged behind the broader market indexes. The average hedge fund, for instance, produced an 11 percent return in 2013, while the S&P 500 index soared by 30 percent, and our own Strategic Wealth Advisor strategies averaged a 43.5 percent gain.

Skeptics contend that, if returns stay sluggish, investor patience will wear thin and the alternatives boom will run out of steam. However, McKinsey's new research clearly indicates that the boom is far from over. In fact, it has much more room to run.

In late 2013 and early 2014, McKinsey surveyed nearly 300 institutional investors managing $2.7 trillion in total assets and conducted more than fifty interviews with a cross-section of investors by size and type. At that time, the vast majority of institutional investors intended to either maintain or increase their allocations to alternatives through 2016.

Enthusiasm was especially high among sovereign-wealth funds, as well as large and small pension funds, but not mid-size funds. Wealthy individuals were also moving rapidly into the market, as new product vehicles provided retail investors with unprecedented access. McKinsey estimates that flows from each of these four groups could grow by more than 10 percent annually through 2019.

McKinsey also identified four secular trends among institutional investors favoring the growth of alternative investments relative to traditional investments:2

  1. Disillusionment with traditional asset classes and products...

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