Investors seek diversification within alternatives, positive for ILS

by Artemis on March 9, 2017

Large and institutional investors, such as pension funds, insurers, family offices and endowments, have increased their allocations to alternatives in 2016 and are seeking diversification within alternatives, which should be positive for insurance-linked securities (ILS) funds.

Every report we read these days on investment trends among institutions and the larger investors, points towards an increasing interest in alternative asset classes, particularly as investors are looking for something to diversify their returns away from equities and bonds.

But now, research from Preqin suggests that investors are becoming so comfortable with alternatives that they are looking to diversify within the space, with over a third of investors now having exposure to at least four different alternative asset classes at the beginning of 2017, which is a significant increase on the prior year.

Andrew Moylan of investment sector data provider Preqin commented that there is a; “Considerable appetite for alternative assets within the investor community at present, with many looking to ramp up their participation within these markets. It is notable that although the proportion of investors that are not involved in the alternatives industry has remained relatively consistent, those with exposure are now expanding and diversifying their exposure to different asset classes.”

Moylan also noted the; “High level of satisfaction across the alternative assets industry, and it seems as though investor demand for alternatives will continue to grow and become more sophisticated in the near future.”

Preqin surveyed over 533 institutional investors to reach its conclusions, that alternative assets continue to increase in popularity and now more investors seek diversification within alternatives.

Only a quarter of respondents invested in more than four alternative asset classes a year ago, so the rise to a third in just one year reflects the growing adoption of alternatives and the increasing size of alternatives portfolios.

As institutional investors look for more alternative asset classes to allocate to, as well as for diversity, reinsurance and ILS funds should increasingly appear in their consideration set.

ILS and investing in reinsurance linked assets does remain a relatively small alternative asset class, one which Preqin terms as “niche”. That means it’s not always the first consideration, but once institutional investors discover it, and gain an understanding and appreciation for the lack of correlation it can show within a portfolio, we expect that demand to allocate will rise.

An impressive four-fifths of investors surveyed by Preqin now allocate to at least one alternative asset class. Given the sophistication and complexity of ILS and reinsurance linked assets, it is unlikely that it would be the first alternative asset an investor would discover, more likely being an addition to a growing alternatives bucket.

But that bodes well for future interest and continued demand for ILS funds and reinsurance investments, as the overall allocation to alternatives continues to grow and expand in diversity.

One word of caution though, Preqin also says that some investors are looking to down-size allocations to hedge funds, which ILS fund managers are often qualified as by investors and investment advisors. However Preqin does explain that the impact is likely to be larger on some strategies than others and the “niche” strategies saw a relatively static year in 2016.

The continued focus on alternative asset classes and the growth of alternatives within investors such as pension funds portfolios should ultimately benefit the ILS sector, by increasing the capital in the space. Of course now the ILS and reinsurance market just need to produce sufficient supply to meet this demand and harness this capital within the industry.

Also read:

Pension funds continue alternatives push in 2016, positive for ILS.

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