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Why Alternatives Aren’t Expected to Have Premium Returns


Dec. 4 2020, Updated 10:42 a.m. ET

2016 performance

Alternatives expect weak performance in the second quarter of 2016 on weak performance of various asset classes. Blackstone (BX) and Apollo (APO) are expected to report EPS (earnings per share) of $0.65 and $0.36, respectively, in the June quarter.

Blackstone is expected to benefit from improved hedge fund and private market performance. Its record deployment in the previous two quarters will have a positive impact on its base fees, supported by performance fees on improving holdings valuations. In the September quarter, Blackstone is expected to see $0.68 in EPS as emerging markets find their bottom and commodity prices stabilize or improve marginally.

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Carlyle and KKR

Carlyle (CG) and KKR (KKR) are expected to post EPS of $0.39 and $0.40, respectively, on energy holdings and distressed credit performance. They’re expected to make profits per share of $0.46 and $0.49, respectively, in the September quarter on new capital deployment improvements in their public holdings.

Carlyle’s focus on the performance of its portfolio companies combined with the select sector-based deployment of its capital helped the company generate higher performance fees over the past couple of years.

In distressed markets, investors tend to prefer ETFs with lower costs. They perceive alternatives as not providing superior returns compared to the overall market (SPY). Alternatives saw negative performance fees in the second half of 2015 on falling valuations.

The trend of weaker earnings is expected to continue as valuations on equities exhaust in the United States and Europe. The lack of growth across the spectrum will impact portfolio valuations. A focus on select Asian markets is back, and that can generate new winners and losers accordingly. Analysts believe that alternatives can see some dent in their earnings due to weak operating fundamentals.


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