Alternative investments still too hot to handle

Date: Monday, October 8, 2007
Author: Rita Raagas De Ramos, Asain Investor

Many trustees and fund sponsors are still wary of alternative investments, fearing governance mechanisms that are in place don’t make the grade. Even if they wanted to allocate to alternative investments, many trustees and fund sponsors in Hong Kong, Singapore, Malaysia are hard pressed to do so because of concerns their own governance mechanisms aren’t up to speed and that such products may cap their overall returns.

Half of the trustees and fund sponsors recently surveyed by Watson Wyatt cited lack of governance as a reason they aren’t considering alternative investments. Half said they believe diversifying into alternative investments could dilute their earnings too much.

The consultancy was unable to provide more details about the survey, however, such as the number of respondents or their composition.

Other reasons cited in the survey were not wanting to be a first mover among others not yet investing in alternative investments, the complexity products, and the conviction that equities offer the best long-term returns.

Among the respondents, trustees and fund sponsors in Hong Kong were the most wary of governance issues. The main concern is that alternative assets increase the monitoring burdens and thus require a higher level of governance.

“A growing number of new and diverse investment opportunities are now available, but funds generally have reservations about shifting away from conventional asset classes,” says Naomi Denning, head of investment consulting for Asia Pacific at Watson Wyatt.

Trustees and fund sponsors who are considering diversifying into alternative assets generally prefer hedge funds over other products, especially in Malaysia. Real estate investment trusts (Reits) were generally a second choice. Other options were infrastructure and commodities.

“Although hedge funds have been growing rapidly over the past three years, trustees and fund sponsors in the region require some time to warm up to new investment opportunities,” says Denning.

Denning says the “wait-and-see attitude” needs to change because many are missing out on the opportunities available in alternative investments.