Alternatives become mainstream, says Russell Investments

Date: Tuesday, December 4, 2007
Author: Hedge Funds Review

Pension funds, endowments and foundations that responded to a recent survey across the world are forecasting that over the next two years they will dedicate an even larger slice of their total investment portfolio to private equity, hedge funds and real estate, according to the eighth global report on alternative investing released today by Russell Investments.

As a percentage of total fund assets, institutional investors in North America, Europe, Japan and Australia expect increases in all of these alternative investments, with the one exception of Australian institutional investors keeping their mean strategic asset allocation to hedge funds steady.

Since 1992, Russell has surveyed large tax-exempt institutions in North America, Europe, Japan and Australia to gauge their participation in and expectations for core alternative investing strategies. The results, based on responses from 326 organizations worldwide, are published in a detailed report, 2007-2008 Russell Investments Survey on Alternative Investing.

The institutional respondents around the globe predict that their strategic allocations to hedge funds will increase by 2009, except in Australia where the hedge fund allocation is anticipated to remain steady at 4.1%. European respondents expect allocations to hedge funds to rise from 7.4% to 8.4% while Japanese respondents predict it will increase from 9.3% to 9.9%. The biggest jump is expected in North America, where allocations to hedge funds are forecast to rise from 7.5% to 8.9% over the next two years.

Strategic allocations to private equity by respondents increased in Europe, Australia and Japan and fell slightly in North America. However, all geographic areas forecast allocation increases through 2009.

Across the globe, respondent’s return expectations are strongest for private equity, with expectations for hedge funds and real estate remaining steady. Median return expectations for private equity worldwide vary between 8 percent and 13 percent, with North American and European respondents expressing the greatest optimism for performance of this asset class.

The use of real estate as an investment strategy climbed worldwide over the past two years, particularly in Japan where utilisation rose from only one in five respondents in 2005 to nearly 40 percent this year.