2. Trends in Direct Investment: A Historical Perspective:
2.2 The rise of the alternatives industry 1980-2000
During the 1980s and 1990s, a much greater use of external managers took place, beginning in the United States and spreading quickly to the United Kingdom, continental Europe and other locations.
At the start of this period, most institutions had relatively simple asset allocations across cash, government bonds, listed equities and real estate. More flexible regulation, improvements in performance measurement techniques and the availability of cheap computing power and analysis software enabled more advanced asset allocations, fuelling the shift towards less liquid asset classes.
Most institutions turned to specialist asset managers to help them invest, driving growth in private equity during the 1980s and the hedge fund industry in the 1990s (Figure 5). They believed that private equity specialists, for example, were better placed to source private equity targets, apply the requisite amount of leverage, and inject management talent to improve operating performance. In the following 20 years, many of the early private equity firms grew to become leading alternative asset managers.
The shift towards outsourced asset management also took root in equity and bond markets, causing the 1980s to become known as the decade of the fund manager “superstar”. In the United Kingdom, for example, the in-house management of pension funds was in decline across all asset classes by the late 1980s because of the increased size of the funds and difficulty hiring internal investment managers.12