The investment community loves to muse about them and the industry glossary is quite colourful when it comes to them: alternative investments. There are unicorns, dry powder, long/short, angel funders and many more. But what exactly is behind the stories, terms and myths? Our alternative investments experts Evie Kostakis, Elisabeth Brugger, and Thomas Bischoff offer their views.
These days, private equity and hedge funds are most widely known and practised examples of alternative investments. In this interview, we speak with Evie Kostakis, Deputy Head Investment Management and Head Alternative Investments, and her team members Elisabeth Brugger, Head Hedge Funds, and Thomas Bischoff, Head Private Equity. The team explains the status quo of the alternative investments market and shares their expert advice on what to pay attention to when investing in hedge funds or private equity.
Wasn’t the alternative space reserved for just a few pioneers?
Evie Kostakis: “You’re right. It was once just the hunting ground for the most progressive investors. The first pioneer was David Swensen of the Yale Endowment, who decided to invest one third of the fund’s assets into alternatives back in the 1990s.
This was a widely radical idea back then. By now, it became established as a generally accepted theory – the famous ‘Yale model’. Swensen was of the opinion that the best opportunities lie not in buying and holding ordinary stocks, but in long-term investing in rare hedge fund strategies and private equity. This was a ground-breaking approach, especially coming from the financial head of a non-profit institution. It’s been replicated by many since then.”
Can we say that alternatives became mainstream since the 1990s?
Evie Kostakis: “What we can definitely say is that they are coming of age and gaining greater acceptance from a wide spectrum of institutional and private investors. This development took thirty years. Private capital grew steadily, which led to individual investors taking greater control of their wealth creation strategies. They also become more sophisticated and differentiating in their approach.”
How big is the industry?
Evie Kostakis: ““The assets under management (AUM) in alternatives reached a staggering USD 9.5 trillion at the end of 2018. This is around 12% of all wealth managed globally, and is forecasted to grow to USD 14 trillion by 2023. Around one third of this is in private equity, one third in hedge funds, and one third is spread across the rest of the industry. The last couple of years largely contributed to this growth trend, when investments in public markets fell between 7-9%, while investments into alternatives rose by about the same rate."
Talking about hedge funds: What are the three most important points that investors should check before considering this asset class?
Elisabeth Brugger: “The key difference between traditional mutual funds and hedge funds is that the first can invest in only stocks and bonds, while the latter can invest in almost anything - from land deals to options against a specific currency (thereby betting against that currency). This is why the investment strategies are open-ended and the objectives to employ hedge funds are completely different from one investor to another. Therefore, in my view, the most important thing to do is a relentless due diligence before choosing the right strategy and the fund to invest in. You should, as an investor, have an extremely experienced and knowledgeable investment team in your corner, unless you can cover all grounds by yourself.”
And once invested, what should they pay attention to?
Elisabeth Brugger: “While hedge funds might employ short-term tactics to navigate the market, the full market cycle is roughly seven years and you should stick to your investment strategy throughout the cycle. This means that patience on the part of investor is the biggest pre-requisite to bring to the game. Stay the course and don’t try to time the market.”
Let’s focus on private equity. What is your most important piece of advice regarding this asset class?
Thomas Bischoff: “I always tell my clients that private equity is like a marriage. Once you’re in, you’re locked in for the long term, so you better do your due diligence and know what you’re getting into. There are of course ‘exit’ routes, but these are like a divorce and cost a great deal.”
Which challenges will private equity investors face over the next years?
Thomas Bischoff: “I see three key challenges: First, fierce competition drives price wars. The second one is access. New players keep entering the market, which makes the universe exponentially bigger every day. This means that selecting the right managers gets harder and harder for investors, especially on the smaller end of the market. It’s not a buyer’s market. Managers can select their investors. Finally, the macro environment poses a challenge. Private equity managers are much less concerned with interest rates than they are with the growth indicators.”
This portrait is part of the ’Wealth Architects’ series in which we introduce you to our employees. All of them have practical tips and tricks in their area of expertise for you.