Michael Fascitelli of Imperial Companies and Michael Ricciardi of Mercury Capital discuss the current state of global real estate investing.
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Modest Start – LP have been conservative in their commitments in Q1
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An in-depth conversation with industry experts.

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Insurance companies have been steadily expanding their exposures to hedge funds, and managers are likely to see continued growth in the coming years, according to a new report on alts product exposure at insurers.

Though fund managers face a demanding client base in insurers, which require much more transparency and detailed reporting than other institutional investors, the insurance marketplace still is new enough to hedge funds that managers may see few competing peers, says the report from Patpatia & Associates.

That could mean opportunities for forwardthinking hedge fund managers. “It’s still a comparatively underserved market,” says Bill Limburg, senior associate at Patpatia. “We believe there is room for firms that take a more solutionsbased approach to gain assets and share.”

The report outlines how insurers pulled back from hedge funds in the wake of the 2008 financial meltdown, but then “steadily rebounded.” Insurance company assets invested in hedge funds totaled $11.1 billion in 2009, but nearly doubled to hit $21.1 billion by 2013, the most recent year data was available.

Insurance companies have traditionally invested almost all of their general account assets in fixed income securities, though many have been slowly adding equities in recent years and, even more recently, alternatives. Especially in the low yield postcrisis environment, some insurance companies see hedge funds as a way to get a little extra alpha, though most observers say it’s mainly about gaining diversification.

Insurers are also raising their exposure to other alternatives, notably private equity, but not by as much: allocations to hedge funds “have grown at an 11.4% CAGR from 2008, surpassing private equity allocation growth in the same time period” of 8.9%, the report says.

Multistrategy “remains the most popular choice” for insurers, with 32% of investors holding such funds, according to Patpatia’s report, though this figure is down from 43% in 2008. Secondmost
popular is longshort equity, although this too may not be as dominant: “Some [investors] expressed that it will not be their preferred focus moving forward,” the report says. “Several interviewed insurers have resources to manage longshort equity strategies inhouse, and are not willing to pay a third party for what is seen by some as essentially ‘stock picking.’” …

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Lured by the presence of lower commissions and the absence of sometimes awkward sales pressure, investors of all stripes appear eager to embark on relationships with robo-advisors.

But fear not. That doesn’t mean investors will “unfriend” their professional financial advisors. Most still want the option of talking to a trusted financial confidante. For investment firms, the challenge is how best to combine digital, low-cost investment advisory services with the traditional approach.

It’s becoming clear that no single formula exists for how—and at what cost—traditional wealth managers should mix a digital experience into their designed client journey. Several brokerages have developed proprietary robo-advisory platforms in-house. Others have been acquiring existing robo-technology to build out their service, offering it as a white-label solution. Indeed, the sector has not lacked for deal-making activity as industry players hunt for the kind of technology they need to bag premium-paying procurers.

In February, for instance, Mercury Capital launched a pilot program in collaboration with Emotomy, leveraging the latter’s digital advice platform. That engagement is the latest of many industry marriages, which have also included RBC Wealth Management’s alliance with FutureAdvisor and Pershing’s partnership with Marstone, both of which are aimed at producing technology platforms for advisors. The commotion is not likely to stop there, as more and more incumbents sense the potential for automated advice-givers. The market can expect to see other asset management firms, as well as wealth advisors, find ways to get in on the robo-activity. Over the long term, such partnerships may expand to combine personal relationships and digital experiences customized for each client segment. While digital platforms will need time to scale, :

Robo-advisors have broad appeal. Such partnerships indicate that the emerging hybrid model is aimed squarely at addressing a demographic beyond millennials. Even high net-worth clients, whose complex needs typically require human intervention, will want the option of interacting with a digital wealth experience that guides them on their route from prospect to client. The dreaded baby boomer cohort isn’t retreating at the sight of the millennials. In fact, as members of the older generation succumb to retirement, their needs will grow more complex.
Millennials will serve as early adopters.The next generation of investors has been quick to embrace new technologies and experiences, and this should apply to robo-advisors. Furthermore, millennials have a general mistrust of large financial institutions, particularly in the wake of the financial crisis of 2008. Unlike their parents, who forged close relationships with advisors—even using their phones to have conversations with them, as primitive as that sounds—millennials are equally comfortable with making digital connections. They’ve been conditioned to accept that technology can match the performance of its human predecessors, while offering reduced fees and providing greater convenience.
Robo-advisors will gain popularity across all client segments. As machine-learning algorithms continue to develop and produce an investment record, consumers are likely to use these services more and more to complement their existing investment methods. As millennials mature—and their assets increase—they could very well tilt the balance toward more automation, which would be augmented at higher asset levels with a personal relationship.
Typical to any disruptive innovation in financial services, the first to market addresses the underserved. Robo-advisors like Betterment, Wealthfront, and Personal Capital did just that. But automated digital advice has clearly attracted the attention of incumbents. Established players are deploying a quick follow strategy through acquisitions and creating “me too” experiences that emulate disruptors. Scale and distribution matter, and the quick followers don’t need to get it perfect. What’s next? Differentiation. The leaders will need to design a unique digital experience integrated into the fabric of how they serve their clients that combines personal relationships with a digital experience.

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