The Journal The Authority on Global Business in Japan

The investment world is becoming increasingly concentrated and assets under management (AUM) are in the hands of fewer—usually well-established—fund managers. At the same time, newer and smaller asset managers, often focusing on alternative investments, are generating some of the most interesting performance profiles.

This trend toward concentration is visible across all asset classes, from traditional assets (long-only invest­ments in stocks and fixed income) to alternative investments (everything else). Two of the long-term drivers have been the high costs of complying with increased regulations put in place after the global financial crisis of 2008, and the increased costs of technology-driven investment management.

UPWARD TREND
The total AUM of traditional assets over­seen by the 500 largest managers exceeded $80 trillion in 2016. The top 20 managers handle more than 42 percent of AUM. Passively managed assets, such as exchange-traded funds (ETFs) continue to gain share of total AUM at the expense of active management.

Although passively managed assets remain significantly smaller than actively managed ones, their share is growing quickly. A major factor driving this trend has been downward pressure on traditional fee structures from investors coping with the current low-interest-rate environment.

Alternative investments remain sexy topics garnering much media atten­tion. At the same time, as an asset class, they are much smaller. Despite AUM of about $10 trillion, alternatives have shown similar trends toward concen­tra­tion. Private capital (e.g., private equity, real estate, private credit, natural resources, infra­structure) has reached about $5 trillion.

As much a particular mindset as about specific investments, alternatives is a broad term that may cover “unicorns” (those large pre-IPO private companies such as Uber), large private equity funds such as SoftBank’s $100 billion Vision Fund and the $25 billion Apollo Fund IX (for buyouts), or hedge funds, venture capital, and private credit.

One notable anomaly is that, nowadays, real estate is considered an alter­­native invest­ment. In fact, it is probably the oldest investment class in the world and one of the first to be registered, traded, or pledged as collateral.

HEDGING BETS
Globally, 2017 was a great year for hedge funds—AUM reached a new high of $3.2 trillion. For the first time in 15 years, this investment sector generated positive returns in all 12 months.

Hedge funds are also extremely con­centrated. More than 60 percent are based in just three locations: New York City, Connecticut, and London. And the top 11 percent of hedge fund managers control more than 90 percent of AUM.

Quantitative funds—automated, algo­rithmic investment approaches such as high-octane strategies powered by artificial intelligence—have shown dra­matic growth both for hedge funds and ETFs. Estimated AUM for quantitative strategies exceeds $1.5 trillion.

Venture capital continues to grow and become more concentrated. Globally, in 2017—the most active year since the dot-com era—in excess of $164 billion was invested in more than 11,000 tech startups. That’s up 50 percent from 2016. Of those numbers, the United States accounted for about 45 percent of the money invested and 49 percent of the deal flow.

GOING PRIVATE
One of the fastest growing alternative strategies is private credit, where private equity-style funds make mezzanine loans (usually unsecured loans, and many types exist), replace bank loans, etc.

As investors remain under pressure to find effective means of diversification and investment performance in an atmosphere of lower expected returns from traditional asset classes, alternatives are becoming increasingly popular.

Seeing this trend, and looking to educate the business community and help identify lucra­tive and interesting alter­native options, the American Chamber of Commerce in Japan formed the Alternative Investment Subcommittee in 2015.

I’m pleased that, after many successful events and thanks to the support of ACCJ members and our wonderful guest speakers, 2018 finds us elevated to the position of full committee. Together with vice-chairs Christopher P. Wells and Jenifer Rogers, I look forward to continuing to share and explore alter­native investment opportunities with you all.

Frank Packard is chair of the ACCJ Alternative Investment Committee.