The alternative frontier has grown rapidly since the 2000s, and, just like the Wild West of old, this rapid growth brought with it bandits, highwaymen and, latterly, lawmen that helped to tame it.
Reading through the conclusions of the 2014 edition of Intelligent Partnership’s Alternative Investment Report, it is clear that the alternatives market is beginning to mature, partly as a result of the Financial Conduct Authority.
There are currently over 800 alternative products in the UK market, but according to the AIR, the rate of growth is showing signs of slowing, and it is expected that there will only be half as many new products issued this year as last.
According to the report, this slowdown is “almost certainly a result of the regulatory intervention”.
It said: “If the FCA wanted to stem the number of products entering this market, they do appear to have succeeded.”
However, the argument goes, the likely result of this increased focus by regulators, particularly on the unregulated parts of the spectrum, means that those products that remain are likely to be of higher quality.
If this happens, the report says, “It will give the sector a chance to repair its damaged reputation and it will give participants such as advisers and SIPP operators an opportunity to catch their breath, take stock of what is out there and get comfortable with recommending and accepting alternatives”.
It adds: “Slower growth and fewer, higher quality products will ultimately be a boon for this part of the alternative investment universe.”
However, while regulation has focused much of its attention on the unregulated collective investment scheme (UCIS) space, from an adviser and a product operator perspective property, particularly commercial property still dominates the alternatives market.
Of the companies that structure and operate alternative investments surveyed for the report, 80% have structured a commercial property investment within the last 12 months, closely followed by residential property. According, to the report, “student property, short-term debt, energy and other have also been popular sectors. Other includes tech venture capital, land and loan funds,” from a structuring point of view.
Asked which alternative investment sector they currently recommend to clients, $8% of the financial advisers surveyed answered commercial property, followed by energy investments (40% of respondents) and agriculture (38%), while precious metals were only being recommended by 20% of those surveyed.
Interestingly though, 60% of those respondents that create alternative products reported an increase in the number of firms looking to structure investment products during the last 12 months.
“This may stem from improved investor confidence due to the strengthening UK economy, and investors wanting to diversify their portfolios and move away from low yielding assets such as cash and bonds,” the report said. But, added, “It could also be down to providers realising that they are now going to be compelled to use a fund structure rather than be classified as an Non Mainstream Pooled Investment.”
However, it pointed out that 20% of respondents saw a fall in demand from product providers, which the group believes could be down to increased regulatory scrutiny from the FCA.
The world of alternatives has clearly moved beyond where it was in the early parts of the century – regulation has increased, the number of products on offer has grown and investors are demanding more on all levels.
There remain risks of course, a look at what happened in the student accommodation space is just one good reminder of that, but in a world where many of the old rules no longer seem to apply, more options that are beginning to mature must surely be a good thing.
