The flood of regulations surrounding alternative investments is leading institutional investors to demand more liquidity from investment managers, among other requirements, and
the number of providers will be reduced.
While EU asset managers see regulation, such as the Alternative Investment Fund Managers' Directive (AIFMD), as a competitive advantage against non-European counterparts, investors are more discerning in their expectations of the industry, according to a survey conducted by UBS Fund Services and PwC.
More than half (57%) of the 44 investors interviewed plan to narrow down the number of different alternative asset managers they use in the next one or two years, with increased expertise in the sector driving them to focus on fewer key relationships.
The survey also revealed that a higher proportion of institutional money in alternative asset classes is inspiring a more rigorous approach to selecting managers.
Mark Porter, head UBS fund services, says: "Institutional investors are demanding more transparency and increased liquidity from their alternative asset managers."
A 1% growth of alternative investments within the portfolios of global institutional investors is predicted in the next 12-24 months due to a growing appetite for infrastructure and real assets in particular.
Institutional money currently makes up 80% of the hedge fund industry, and Porter says rising interest in how performance is achieved and how risks are managed may lead to an increase in due diligence requirements for alternative managers.
Technology is also an important focus, as investors express concern about 'big data' capabilities, reporting and fee structures.
Porter adds: "New regulations are expected to accelerate demand from investors for real-time data tools to manage risk. We expect access to portfolio-level, real-time data to become the norm."
While a number of the new regulations were seen as neutral, 83% of European insurers expect the Solvency II Directive to have negative consequences, with its increased governance, disclosure and data requirements leading some to review their alternative investment strategies.
The 44 institutional investors surveyed hold $1.9 trillion (€1.5 trillion) in assets under management. Just over half (52%) of the participants were based in Europe, 39% in North America and 9% in Asia. Most of the respondents were insurers (50%) and pension funds (39%).
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