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The Past, Present, and Future of the Industry

In this article

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In this lesson, we're going back in time to the very beginning of alternative investments, exploring how the industry has evolved from a single railroad investment to having more than $10tn in assets under management. We'll also take a look at what the future holds for alternative investments, as the industry continues to grow at unprecedented rates.

Alternatives: An Early History

Although ‘alternative assets’ is a relatively modern term, investment in these types of assets is not a new phenomenon. Some of the earliest examples of private-capital-type investments can be traced back as far as the 1800s, when individuals made investments into projects during the Industrial Revolution.

Restrictions to the financial structure of banks at that time meant that private investments were largely dominated by wealthy families and individuals.


First ‘alternative investments’ made in infrastructure: The Transcontinental Railroad


First leveraged buyout: J.P. Morgan acquires Carnegie Steel Company (creating United States Steel)


First family office: The Bessemer Trust


First venture capital funds: American Research and Development Corporation and J.H. Whitney & Co.


First fund of funds: Investors Overseas Services


First hedge fund developed by Alfred Winslow Jones

Alternatives: The Growth

Alternative investments grew in prominence during the 20th century, particularly after the World Wars when many countries began to rebuild. During this time venture capital became the catalyst for success in private markets. With technology changing the landscape for many industries, venture capitalist investment in new technological developments and entrepreneurial opportunities expanded rapidly through the 1960s and early 1970s.

After the stock market crash of 1974, regulatory change also served to boost the industry; the US Government introduced the Employee Retirement Income Security Act (ERISA), allowing pension funds to invest in ‘riskier’ opportunities. The capital gains tax rate was also reduced to aid recovery from the crash, causing an influx of capital into private equity investments (the term ‘private equity’ superseded ‘venture capital’ in the 1980s as a term used to encompass all investments in private equities). A boom in leveraged buyouts followed in the 1980s and private equity began to appear in the portfolios of mainstream investors, laying the foundations for the industry we see today.

Hedge funds
also originate from the mid-20th century, when the first hedge fund was purportedly developed in New York City in 1949 by Alfred Winslow Jones. He successfully devised a hedging approach that sought to reduce a portfolio’s exposure to market movements, relying heavily on the investment manager’s skill in selecting securities. A.W. Jones & Co. also instituted two other hedge fund hallmarks: the requirement for managers to make significant personal investments in a fund, and a compensation structure that awarded the manager with 20% of fund performance profits.

For many years, the Jones method was known only to a small group of investors. However, in 1966 it was revealed in a Fortune magazine article that Jones had outperformed the best mutual fund over the past five years by a significant margin. With that, the hedge fund industry boomed, and by the early 1980s many new strategy variations had begun to appear in the market.

Where Is the Industry Today and Where Are We Headed?

The alternative assets industry has continued to grow in recent years and is now a mainstay of the modern investment landscape. Industry assets under management (or AUM) are at record highs, and investor and fund manager interest in alternatives has increased steadily over time.

What is AUM?
AUM provides a measure for the total market value of all alternative investments managed within the industry. An examination of AUM shows how the industry has grown over the past 10 years: from $3.1tn in 2008 to more than $10.2tn in 2019. This growth is likely to continue and even accelerate: Preqin predicts that by 2023 industry AUM will have reached a record $14tn.

The level of growth expected in each individual asset class varies significantly, with some smaller or newer asset classes (e.g. private debt and natural resources) set for much sharper growth than the more established markets (e.g. private equity and hedge funds). As newer asset classes have emerged over time, primarily as offshoots of private equity, these smaller markets have attracted significant levels of investment from institutional investors. (For more information on these asset classes, see Lesson 4.)

Increased demand from investors has been the key driver of growth within the industry. No longer a choice reserved for a select group of sophisticated investors, alternative assets have grown to represent a significant portion of many institutional investor portfolios. The number of investors allocating capital to alternatives has grown from 3,500 in 2008 to more than 11,000 a decade later in 2018. A Preqin survey in 2018 found that 84% of investors plan to increase the amount of capital they commit to alternative assets over the coming five years. Industry growth is likely to continue well into the future.

Another key driver has been the expansion of emerging markets. Asia-Pacific, the Middle East, and Latin America – in particular Southeast Asia, China, India, and Brazil – are playing an increasingly important role both as a source of capital from investors allocating to alternatives, and as the focus of investment opportunities for fund managers looking to deploy capital.

In this lesson, we followed the journey of alternative assets from the very beginning, when infrastructure investments were made by wealthy families, to the dawn of hedge funds. With investment in private markets gaining traction like never before, we also covered the potential growth areas and what the future of this industry could hold.