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Potential market downturn has institutional investors and family offices planning to increase allocations to alternative investments in 2018

Saturday, March 31, 2018
Opalesque Industry Update - The Context Allocator Trends Report, based on a survey of more than 400 institutional investors and family offices, revealed strong demand for alternative investment strategies, with 70% of respondents planning to increase their allocations to alternatives in 2018 and 29% planning to maintain their current allocations.

The demand for alternative investments is supported by doubts over how long the current bull market can last, with 69% of institutional allocators surveyed predicting that traditional equities and fixed income markets will underperform in 2018 when compared to 2017, and an additional 19% predicting similar year-over-year performance. Investors looking for strategies that offer the potential for a differentiated return stream are now increasingly turning to cryptocurrencies and ESG or impact-related strategies, which are two of the fastest-growing sectors in the investment management industry. However, whereas 51% of investors are planning allocations to ESG strategies in 2018, just 11% are looking to add cryptocurrencies to their investment portfolios.

The full survey results, along with an analysis of key findings, are available via the latest Context Allocator Trends Report at: https://contextsummits.com/resources/allocator-trends/.

Ron Biscardi, co-founder and CEO of Context Capital Partners, commented: "This survey was conducted immediately prior to a 10% drop in equities prices and a spike in market volatility, so it's prescient that many institutional allocators were already planning significant allocations to alternative investment strategies, which offer investors the potential for downside protection as well as asymmetric returns that are uncorrelated to traditional market risks. We believe this strong demand for alternatives will continue as market participants adjust to the uncertainty ahead."

Additional key survey findings include:

Market Cycle is Nearing an End: Only 31% of institutional allocators and family offices believe the market in 2018 will match or exceed its performance in 2017, suggesting the cycle may be coming to an end. In preparation for a potential downturn, nearly 60% of investors are taking steps to reduce or hedge directional market exposure in equity or credit markets.

Skepticism About Crypto Strategies: There remains uncertainty surrounding the long-term investment merits of cryptocurrencies as 71% of allocators have no plans to invest in crypto-related funds and 18% are still undecided. At the same time, there was broad confusion and skepticism about the viability of crypto as an asset class, with 27% calling it a fraud, 27% calling it legitimate and the remaining 47% saying they "don't know."

Increased Adoption of ESG Strategies: While most allocators (63%) don't yet view Environmental, Social and Governance factors as a significant part of their overall investment philosophy, more than half of those polled (51%) believe they will increase their allocations towards ESG or impact-related funds in 2018, evidence of the sector's growing popularity.

Allocators Prefer Emerging Over Existing Managers: 60% of investors said they prefer to allocate to emerging managers (defined as those with shorter than a 3-year track record and/or less than $300 million in AUM), while about 75% of those surveyed said they look for managers with at least three years of performance history.

Rise of Quants Slows: A strong majority (71%) of allocators have not replaced any of their hedge fund exposure with algorithmic or quantitative smart beta strategies.

"While current fiscal policy and robust economic growth remain a tailwind for risk assets, the recent uptick in market volatility, alongside the long-term shift in monetary policy, have created real reasons for concern among investors about their traditional market exposure," added John Culbertson, CIO of Context Capital Partners. "The alternative asset management industry is well-positioned in the middle of these forces, providing institutional allocators and family offices with access to investment strategies that offer both diversification from traditional risk assets and the promise of a differentiated return profile."

The annual allocator survey was conducted at Context Summits Miami 2018, an annual event that convenes fund managers and allocators for a series of one-on-one meetings. In total, more than 2,000 managers and institutional allocators representing over $5 trillion in combined assets under management attended the two-day conference, which was hosted by Context Capital Partners, a leading alternative investment specialist firm.

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