Alternative asset classes regain favour as interest rates tick down
Rate cuts are just one of the many factors driving investors to seek returns outside of equities
THE cutting of interest rates by the US Federal Reserve has seen investors shift their allocations away from equities. But this has proved to be positive for alternative asset classes such as private equity (PE), venture capital (VC) and hedge funds.
A survey by data platform Preqin in November 2024 showed about 50 per cent of investors were looking to increase capital allocation to PE and 31 per cent of investors to VC. This is an improvement from 2023, when more investors sought to pare down allocations to PE and VC.
Michele Ferrario, co-founder and CEO of StashAway, said: “Rather than moving away from equities, we saw clients reduce their cash allocation in 2024, reallocating funds from cash management solutions to public and private market investments.”
Private banks and wealth management platforms queried by The Business Times said that investors have shifted their allocations away from equities and into alternatives.
Bank of Singapore has experienced double-digit year-on-year growth in their clients’ investments into alternatives in 2024, while UOB clients’ allocation to private-market funds almost doubled.
Neo Teng Hwee, chief investment officer of UOB, said: “They are attracted to the lower volatility and higher returns of the alternative asset class, but are also mindful of the illiquidity.”
Julius Baer reported a 50 per cent uptick over the past quarter in client activity in the alternatives space. At DBS, more than S$1 billion was raised from ultra-high-net-worth individuals for its alternatives offerings.
Shee Tse Koon, DBS’ group head of consumer banking and wealth management, said: “On the back of strong risk asset performance, particularly in developed market equities, we continue to see increased client appetite for alternatives, and we expect this to grow.”
Wealth management platform StashAway reported a capital inflow increase to private market products of some 280 per cent in 2024 compared to 2023, while Endowus has seen assets under advisory of alternative funds grow more than 2.5 times in 2024.
Rate cuts are just one of the many factors driving investors to seek returns outside of equities.
The growing sophistication of investors understanding the need to diversify into private markets has also contributed to the move, said Rajesh Manwani, head of markets and wealth management solutions, Asia, at private bank Julius Baer.
The potential volatility of the public markets from economic and geopolitical developments have made alternatives even more appealing.
US growth outlook
In addition, new products have helped lower the barrier to entry for new investors.
“Many of these products now require smaller capital commitments, are open-ended, and, in some cases, accessible to retail investors, making them more attractive to a wider range of clients,” said Manwani.
The ongoing impact of rate cuts on equities is traditionally seen as a positive sign, but the current environment is more complex. The long end of the interest rate curve, or bonds with 10-year maturities, have continued to rise, weighing on equities’ performance.
There is still cautious interest in equities among investors.
Vivienne Chia, global head, investment solutions group, Bank of Singapore, said: “One dilemma for investors is that the appreciation in US equities over the last six months already reflects a benign US growth outlook and could see a consolidation phase in the first half of 2025 as markets digest the risks of higher long-dated US Treasury yields and a less-dovish-than-anticipated Fed path.”
Private markets are likely to continue to pique investor interest in 2025, as the persistently high interest rate environment abates. The dealmaking environment for PE is also set to improve with increased investor confidence, the Fed’s rate cuts and high levels of dry powder.
Lower interest rates should also benefit PE firms and their portfolio companies, with reduced borrowing costs improving cash flow and profitability. This in turn could make portfolio companies more attractive for exit opportunities.
Coupled with a deepening knowledge among investors on this asset class, alternatives will be part of investors’ diversification efforts.
“Moving forward, we expect to see increased interest in private equity with the potential opening of IPO markets and private infrastructure with broader investment options available for the individual investor,” said Hugh Chung, chief investment officer at Endowus.
