Institutional investment managers set to increase hedge fund allocations by up to 50 per cent

Institutional investment managers are set to increase their hedge fund allocations by 25 to 50 per cent over the next couple of years, according to Christopher C. Geczy, academic director of the Investment Management Consultants Association alternative investments certificate program at the Wharton School of the University of Pennsylvania.

Investors are often searching for diversification in hedge fund investments, says Geczy, an assistant professor of finance at Wharton, noting that recent high-profile hedge fund meltdowns 'do not immutably change the longer-term outlook.

'You'd expect a certain proportion of failures - including some spectacular failures - in a universe that now includes roughly 15,000 funds. But hedge funds are not necessarily riskier as a group just because some fail.'

Institutional investment managers today place about 10 per cent of their portfolios in hedge funds, up from 5 per cent just two years ago, but over the next two years, Geczy forecasts, the average allocation is set to rise to between 12.5 and 15 per cent of their portfolios.

Infrastructure will be a hot alternative investment area over the next couple of years, Geczy says. Much of that investment will go outside the US because 'investors have a fairly hard time accessing US infrastructure investments,' he says.

Only two major deals were reported throughout 2007 in the US transportation infrastructure sector, according to Michael Parker, managing director of Jeffrey Parker & Associates and a presenter at the IMCA programme at Wharton.

The US faces 'a huge need for investment in transportation infrastructure, but there's still a lot of political uncertainty in the near term as to what percentage of that will be done through municipal debt and traditional public finance versus transactions that involve private equity and management of those assets,' says Parker, whose company is an advisor on finance and public private partnerships for highway, mass transit and intermodal infrastructure.

The alternative investments certificate programme aims to provide a greater understanding of the subject to financial advisors, wealth managers and institutional consultants. 'Especially in these days of gyrating stock markets, clients are looking for other investment havens,' says IMCA executive director Dede Pahl.

Other programme presenters included Patrick C. Egan, founder and chief investment officer of Attalus Capital, David E. Lees, senior partner of myCIO Wealth Partners, a consulting firm specialising in alternative investments, and David J. Martinelli, managing partner of Harvest Fund Advisors, which invests in petroleum infrastructure.

Lees, who analyses alternative investments for institutions, endowments and high net worth individuals, and whose firm consults on some USD5.9bn billion worth of investments, says: 'The rewards of being in alternative investments are very compelling, but the risk of choosing wrong, and potentially losing substantial amounts of capital, has also increased versus other investments. If you chose well, you can do very well, if you chose wrong, you can do substantially worse than average.'

Egan, whose firm runs a USD3bn fund of hedge funds for institutional clients, says institutions increasingly are moving into 'active management' of alternative investments in order to achieve the actuarial rate of returns needed to fund their employees' retirement.

IMCA and Wharton have partnered for 20 years to provide educational programmes for investment consultants. Wharton conducts IMCA's Certified Investment Management Analyst programme as well as its alternative investments, investment strategist, and endowments and foundations advanced certificate programmes.