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The alternative investments sector is forecast to see explosive growth over the coming five years, with alternative assets under management, consisting of private capital and hedge funds, likely to reach $14 trillion by 2023.
According to Preqin, a tracker of data on the alternative asset management space, the industry held $8.8 billion of assets in 2017 and this is now forecast to expand by 59% over the next five years, representing compound annual growth of 8.0% per annum.
Within this explosive growth one of the big areas expected to benefit from increasing investor interest and appetite in alternatives is the so-called niche or esoteric strategies, which is where insurance-linked securities (ILS), catastrophe bonds and other reinsurance linked investments sit.
Even at the roughly $100 billion that ILS assets under management contribute today, this is still a drop in the ocean compared to the entire alternative asset class.
Were the ILS sector to grow at a similar rate to global alternative investment assets over the next five years, we would be looking at an ILS and collateralized reinsurance market of roughly $160 billion. However the data suggests this may not be ambitious enough.
Preqin interviewed 420 fund managers and investors, asking for their predictions for AUM in each alternative asset class in 2023, based on AUM counts from 2008 and 2017. Preqin then worked out an average of the responses received to produce its predictions for this market growth.
While private equity funds are expected to overtake hedge funds to become the largest asset holder in the alternative asset class, the niche and esoteric areas of investment, as well as other alternative drivers of diversifying return, are expected to be the big winners.
Some forecast that the average allocation to these niches and so-called esoteric areas within alternative assets will grow by more than double, as a component of the average investors portfolio.
This aligns with the expectation that institutional investors in particular are likely to significantly increase their focus on finding diversifying sources of return, with niche alternatives a likely beneficiary area of the overall alternative investment landscape.
While some areas of alternative investing have become particularly popular and in some cases crowded, the niche areas of the investment landscape, among which ILS and reinsurance linked investments generally sit, are less crowded, but as we see in ILS the scale of these markets is not just held back by asset inflows, but by the actual investment opportunities required to grow the sector.
Most investors intend to access niche and specialty alternative asset classes through specialist investment managers, as these tend to be less accessible as assets you can allocate capital to on your own.
That bodes well for the ILS funds and reinsurer owned third-party capital units, who are likely to see the majority of the growth as the overall alternatives sector grows and niche strategies become an increasing part of investors portfolio mix.
Overall, Preqin believes that hedge funds will grow by 31% to roughly $4.7 trillion by 2023, but it does seem that the niche strategies and those offering a way to escape financial market correlation will likely grow the fastest, which should benefit the ILS market and ensure continued capital flows into reinsurance linked strategies over the next five years.
Commenting on Preqin’s overall forecast Mark O’Hare, CEO, said, “Fourteen trillion dollars may sound like an overly ambitious prediction for the alternative assets industry, but it is lower than the average growth rate we’ve seen in the past decade. If anything, we believe that $14tn is more likely to be too low than it is to be too high.”