Institutional investors are recalibrating their portfolios, with many expecting market volatility to persist in the new year.
Most investors are interested in increasing their exposure to private equity, alternative risk premia strategies, and fixed-income over the next two years, according to a report published by SigTech on Tuesday. The average net increase in allocations to private equity is expected to be more than 20 percent, the highest across all asset classes, according to the report.
Allocators will increase their investments in real estate, hedge funds, and stocks, but decrease their exposure to commodities and other illiquid private market strategies, according to the report.
Daniel Leveau, vice president of investor solutions at SigTech, stressed that the enthusiasm investors have for private equity may cool down after the value of PE funds are marked to market in three to six months. Once markdowns start to happen, Leveau believes that investors will lean toward alternative risk premia strategies and credit funds, which are expected to see net allocation increases of 13 percent and 12 percent, respectively, according to the report.
“When mark-to-market starts to hit the valuations of private market portfolios, I expect the sentiment to be weaker for private equity and [other] private market investments,” Leveau told II in an interview.
The report is based on a survey of 119 institutional investors, most of whom are public pensions, endowments, and family offices. Half of the respondents are based in North America, 42 percent are based in Europe, and the rest are from Asia. The survey was conducted from October 28 to November 12.
Hedge funds will remain popular. Two thirds of the survey’s respondents plan to increase their allocation to hedge funds, according to the report. Credit strategies have emerged as the most popular category, with 40 percent of investors saying they expect to increase allocation to credit funds in the next two years. Managed futures and multi-strategy hedge funds follow in popularity with 32 percent and 31 percent of investors expected to increase their allocations to these categories.
“I’m not surprised that managed futures and multi-strategies were number two and three, because they’ve been doing well,” Leveau said. But he was puzzled by the rising interest in credit strategies, which lost an average of 8 percent year-to-date ending October, according to eVestment data. “Credit, for me, is hard to explain,” he said. “There are opportunities [where] investors believe hedge funds can profit from the movements in the yield curve and credit spreads.”
In terms of the equity market, investors continue to favor value over growth stocks as macro uncertainty continues to rise. According to the report, more than half of all investors expect value to beat growth in the next 12 months, while only 6 percent think otherwise.
“People are tired of hearing the growth stories that never materialize,” he said. “That’s the biggest consensus trade.”