Alts investing at pensions on the rise even in uncertain times

Crisis oriented funds are raising billions each week, and investors are still eager to put money to work in private equity, real assets, infrastructure, hedge funds and niche-credit strategies.

Lately at Alternatives Watch, we have seen TALF funds, distressed debt funds raise capital in a matter of weeks rather than months. Recent examples include Oaktree Capital Management’s $15 billion distressed offering and Apollo’s $1.75 billion dislocated credit strategy — Accord Series III B.

Last month, Alternatives Watch tracked a heady pace in alternative investment fundraising with fund closings and asset raising totaling more than $35 billion in April.

Such numbers indicate that a large push toward new investment strategies is underway as the stock market seemingly has yet to fully price in COVID-19’s long-term effects on global corporations. Going further out on the risk curve may seem counterintuitive at a time when market volatility is rising and uncertainty abounds over when the global economy will ever be back to “normal.”

According to a new report from Cambridge Associates, however, a number of active managers that have been closed to new investors are accepting new capital, allowing pension plans to upgrade certain parts of their portfolio.

“Taking advantage of new strategies and managers that may have been on a ‘bench list’ requires swift action, meaning that plan sponsors and/or their advisor will have already completed the appropriate due diligence (or are able to do so quickly),” wrote Cambridge execs Sona Menon, head of North America, and Alex Pekker, managing director in “Navigating Market Crises: Insights and Recommendations for U.S. Plan Sponsors.”

They said that by rebalancing portfolios, investors are able to add strategies and managers that may have been previously unattractive such as distressed credit, certain mortgage strategies and closed-end bond fund strategies that may now fit in the growth fixed-income portion of a portfolio.

Certain long/short hedge fund strategies too may cushion the impact of the equity market downturn and serve as a source of liquidity, the team at Cambridge added.

Following the market slump in March, alternative investment consultant Cliffwater issued its long-term capital assumptions predicting average annualized gains of 16% for venture capital strategies over the next decade, 12.65% for private real estate partnerships and 11.55% for diversified private equity strategies.

Hedge funds, meanwhile, failed to reach average returns above single digits in the consultant’s broad review of investment strategies, while U.S. stocks generally are expected to average 8% returns annually for the next 10 years. The consulting firm uses its capital market assumptions to inform its process for determining asset allocation recommendations.

NEPC surveyed its defined benefit plan clients in March and found that most expected a COVID-19-led recession. A total of 63% of plans surveyed expect a negative return in 2020 for the S&P 500 with 15% expecting losses of more than 10% for the year. A total of 31% said they were rebalancing to target weightings in their portfolios.

“While this is a new landscape of uncertainty, NEPC is counseling corporate pensions and all investors to mitigate risk by staying diversified, rebalancing towards targets, and having a clear plan of action,” said Brad Smith, partner and a member of NEPC’s corporate practice group.

The Boston-based consulting firm said in late April that it had several calls with asset managers to discuss the investment opportunity in the TALF program. In turn, they alerted investors that investment vehicles would likely be set up as shorter-dated drawdown funds, like the fund structures used in private debt, private equity and opportunistic credit.