Alternative investments gain appeal among institutional investors

Date: Tuesday, June 22, 2010
Author: Investment Executive

Institutional investors around the world view alternative investments as an effective way to diversify their portfolios, and plan to boost their exposure to these investments in the years ahead, according to Russell Investments’ annual global survey on alternative investing.

Released on Monday, the ninth annual survey shows that pension funds, endowments, foundations and insurance providers expect to increase their allocation to alternative investments by more than a third, to 19% of their total investment portfolios, over the next two to three years.

Real estate, private equity and hedge funds remain the preferred alternative types, although commodities and infrastructure are also expected to make meaningful gains, according to the survey of 119 organizations throughout North America, Europe, Japan and Australia.

“Survey participants confirmed that alternative investing has survived the global financial crisis of 2008 and early 2009 and is poised for recovery, re-evaluation and increased allocations in the coming years,” said Janine Baldridge, head of global consulting and advisory services at Russell Investments. “Alternatives have gained a solid reputation as portfolio-diversifiers and risk-mitigators, and they are expected to gain momentum even if the current global recovery were to falter.”

Allocations to private equity declined in 2009 due to the strong rebound in publicly traded equities but are expected to rebound in 2012. Survey respondents in North America expect the current share of private equity in their total portfolios, currently averaging 4.3%, to increase to 6.8% in 2012.

Survey respondents also expect to increase the proportion of their portfolios committed to hedge funds, to 5.7% in 2012, up from 4.2% in 2009. Previous surveys had average allocations to hedge funds in the 7-8% range in North America and Europe and as high as 9-10% in Japan/Asia.

The survey also found that institutional investors have stepped up their risk management efforts. A striking 84% of respondents have made – or plan to make – changes in their risk management approach, and nearly two-thirds are increasing the sophistication of their internal decision making and governance processes.

Among the 84% who plan to make changes in their risk management approach, more than one-third said they are increasing proprietary research on asset class or asset allocation strategies, or on specialized investments. Additionally, 21% are increasing the frequency of depth of risk reporting; 17% are relying more on risk-budgeting; and 15% are implementing risk management systems.

In regard to alternatives, 44% said they are increasing the depth and frequency of reporting, and 39% indicated they are providing more active education and briefings to boards or senior management.

“Institutional investors responding to the Russell survey indicated that the events of the past two years have brought risk management and governance concerns into sharper focus,” said Julia Cormier, director, alternative investments. “They are doing more of what was working and also taking new steps to fill in the gaps.”