Morgan Stanley’s private banking arm plans to expand its range of alternative investment products, but is not heavily focused on ‘liquid alternative’ offerings, which have been attracting strong flows.
Morgan Stanley Private Wealth Management (MS PWM) is eyeing what it sees as popular themes in the market, such as China A-shares, energy and healthcare. It is also looking at managers focused on European distressed debt strategies and commodity hedge funds.
There are rising stars in the alternatives space, including Asian long/short equity managers investing in China, which the bank may add to its list this year, said Ernest Chan, head of Asia investment management services. He declined to provide names of managers.
The firm aims to offer “back to basics” traditional hedge fund strategies including event-driven, credit, special situations and commodity trading advisers (CTAs), said Chan, who oversees product selection in Asia. It is less focused on liquid alternatives because they limit the use of hedging and could reduce the level of potential returns, he said – concerns that have been raised by others.
But other private banks in Asia, such as Bank of Singapore and HSBC, are showing growing interest in these products as they look to add alternatives to their wealth management platforms. HSBC believes liquidity is key in broadening the appeal of alternatives.
Liquid alternatives are typically hedge fund, private equity, property or infrastructure investments offered in structures that comply with the US’s 40 Act or Europe’s Ucits requirements, meaning they have tighter conditions around how they are managed than typical alternative products.
This could restrict hedge funds to relatively shorter-term strategies, such as long/short or relative value, and prohibit them from using event-driven or credit strategies, Chan said. “When you give up liquidity, you get a higher volatility-adjusted return at the end of the day.”
Hence MS PWM only recommends a limited number of liquid alternative products, but declined to say how many.
The firm also has only a very small selection of managers running unconstrained investment products, because it is difficult to find managers that can truly deliver absolute returns, said Chan.
Unconstrained strategies allow managers to allocate to a variety of asset classes, securities types and sectors and not to be tied to a benchmark. They have gained popularity, especially in fixed income, with a view to providing more flexibility in terms of allocations to help boost returns in a rising interest rate environment.
MS PWM currently has 15 managers for alternatives, out of a couple of hundred third-party hedge fund firms on Morgan Stanley Investment Management’s alternatives platform.
The firm’s approach is about offering the right products that truly deliver returns rather than about offering a wide universe for the sake of it, said Chan.
He declined to disclose its clients’ average allocation to alternative investments, but said it is above the industry average of 10% and that it expects that figure to rise “in a moderate manner”, without specifying a figure.
The optimal allocation to alternative investments should be 15-20%, he added, because that would provide diversification without overly dragging down the portfolio’s overall liquidity.
Morgan Stanley PWM had $65 billion in AUM sourced from Asia at the end of 2013, according to London-based Private Banker International. Globally, the firm’s wealth business, which includes retail brokerage and private banking, had assets of $2 trillion as of September 30.