February 7, 2023
Alternative Investments Outlook for 2023: A Shifting Landscape
In a 2023 market environment likely to be shaped by higher interest rates, low growth and greater volatility, investors and asset managers are adapting by increasing allocations to alternative investment strategies.
Among the unfolding shifts, private credit strategies are rising to the fore as higher rates increase the attractiveness of this asset class. With no sign of geopolitical turmoil and economic uncertainty abating, interest in hedge fund strategies is also increasing, particularly for those strategies designed to capitalize on changes in volatility regimes.
For other alternative asset classes, like private equity (PE) and non-traded real estate investment trusts (REITs), the picture is more nuanced. Private equity has had an unprecedented run over the past couple of decades, buoyed by historically low interest rates, strong economic and equity market growth and paltry yields on safe investments. In a new era of PE headwinds caused by likely higher rates and lower growth, PE fund managers will need to be more selective about the deals in which they invest and face more competition for the more attractive deals, potentially putting a damper on the likely future returns of this asset class.
Similarly, non-traded REITs are navigating real estate markets where both opportunities and obstacles abound. Office and retail markets remain challenged, buffeted by work-from-home, online shopping and other longer-term trends while markets for industrial space, certain healthcare facilities and e-commerce infrastructure (e.g., warehouses, cold storage, logistics) are buoyant. Though tempered by high interest rates, residential rental demand amid a nationwide housing shortage remains strong, particularly in the “smile” states stretching from the Pacific Northwest through the Southeast experiencing high rates of in-migration.
While this mixed real estate picture has led to gating issues at a handful of funds, capital continues to be deployed and funds with strong liquidity and sufficient diversification remain well-positioned to generate attractive returns for investors.
Investors faced with greater uncertainty and volatility are looking for easier ways to get in and out of positions. The friction of investing in alternatives has not improved for any player in the ecosystem (investor, wealth manager, asset manager). In 2023, we see major adoption of tech that will improve this from secondary trading to SaaS solutions that create the new “rails” for the alternative investments transactions.
As we enter 2023, the one certainty is that the alternative investment landscape will continue to evolve.