Alternative-focused investors are putting more dollars in digital assets

Study examines perspectives of people working for pension funds, high-net-worth individuals, and other large investors

Alternative-focused investors are putting more dollars in digital assets

Amid an explosion of interest in all things digital, cryptocurrencies and other digital assets have quickly become a popular asset class for institutional investors.

According to the 2022 Alternative Investment Allocator Survey performed by top law firm Seward & Kissel LLP, 41% of respondents expect their firms to boost digital asset allocations in 2022, which is more than quadruple the number from last year's survey.

 “While the increase in interest year-over-year by investors for digital assets is dramatic, as outlined in the survey, we are not surprised by these findings as many of our existing clients have expressed interest in exposure to digital assets, either as a direct investment in cryptocurrencies or as private investments in the digital asset ecosystem,” Daniel Bresler, one of Seward & Kissel’s newest Investment Management partners, was unsurprised by the emergence of digital assets as an asset class. “We have seen this both through new, emerging managers and through offerings by existing advisers.”

The second annual survey probes the viewpoints of individuals from pension funds, endowments, family offices, seeders, high-net-worth individuals, and other entities. Their rising interest in digital assets is seen in both their future allocation predictions and present holdings.

Nearly 70% of survey respondents stated they did not invest in digital assets last year; this year, that percentage has dropped to 48%.

Co-investment vehicles, such as special purpose vehicles (SPVs), have increased in popularity among allocators this year, with 38% using them compared to 28% last year.

Across all investor groups, direct fund investments remained the most popular, with 93% of respondents putting directly into a commingled fund, up from 86% last year.

Investors continue to allocate to emerging managers, according to the survey. Nearly three-quarters (73%) of survey respondents said their companies invest in alternative investment managers formed less than two years ago, indicating that they are the overwhelming majority.

The enthusiasm for illiquid strategies, which drew significant allocation interest in 2021, is also consistent with previous years.

A high majority of survey respondents expected their businesses to raise allocations to infrastructure (44%) and private equity (41%) strategies, in addition to the increased interest in digital assets.

Private debt, private equity real estate, and hedge funds were also cited by more than 30% of respondents as areas where allocations should increase (equities).

Allocators are also focused on operational due diligence across all asset classes, according to the report, with 72% evaluating background checks and references as "extremely critical" in running their business.

When their firms source managers for allocations, the investment process was overwhelmingly the most important criterion for 93% of survey respondents.