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Institutional investors to boost exposure to alternative assets

Date: Friday, May 24, 2013
Author: James Langton, Investment Executive

Use of hedge funds is evolving

Institutional investors expect to maintain their exposure to alternative assets, such as hedge funds, a couple of different surveys find; but their role is changing.

A new survey from research firm Preqin finds that at least 80% of investors in alternative assets plan to maintain, or increase, their allocations to various alternative asset classes throughout 2013.

In particular, it reports that 93% of real estate investors plan to either maintain or increase their exposure over the course of 2013; 59% of those that invest in private equity will be maintaining their exposure throughout 2013, with 27% increasing their allocation; 58% of investors with a dedicated allocation to infrastructure are looking to increase their allocation over the next 12 months. And, it says that a third of investors in hedge funds plan to increase their exposure to the asset class, but that about 20% plan on decreasing their allocation throughout 2013.

Separately, the Investor Steering Committee of the hedge fund lobby group, the Alternative Investment Management Association (AIMA), published a new paper on the evolving role of hedge funds in institutional portfolios based on a survey of global hedge fund investors, including pension funds, endowments, foundations and family offices with combined assets of more than US$400 billion.

Among other things, it found that most respondents say they have increased their allocations to hedge funds since the financial crisis, and that most are also planning to continue to increase the size of their investments in the next few years. However, it notes that the role hedge funds play in these portfolios is changing.

AIMA says that it found that institutional investors are moving away from the traditional portfolio structure of 60% allocations to equities, and 40% to bonds, and that they are using alternatives in general, and hedge funds in particular, to customiZe their portfolios. Indeed, it says that investors are using hedge funds to meet objectives such as diversification, and lowering volatility; rather than as a separate asset class.

Michelle McGregor-Smith, a member of the AIMA committee that wrote the paper, noted that institutional investors are now the biggest source of assets for the hedge fund industry globally, and that these allocations continue to grow.

"Many people have questioned this and asked what value hedge funds can provide. We have set out to answer this by explaining the role that hedge funds can play in our portfolios," she noted. "What our paper shows is hedge funds are increasingly regarded as tools that enable investors to customise their portfolios and achieve individual objectives in terms of risk-adjusted returns, lower correlations, lower volatility, greater diversification and more downside protection."

The AIMA survey also found that investors would like to see the hedge industry offer lower fees, more transparency, better governance, and make improvements to operational infrastructure. At the same time, it says that some investors cautioned that they do not want to be swamped with unnecessary information. And, while many investors welcome the increased regulation of the hedge fund industry, some expressed concern that the reforms could be onerous, or too restrictive. Additionally, investors said they would like hedge funds to take fewer investors and build stronger strategic partnerships with them in future.

AIMA also notes that investors are undertaking a great deal of due diligence before making hedge fund investments. And, the Preqin survey adds that 64% of the respondents to its survey have an internal investment team that proactively sources and examines alternative asset fund investments; 67% say have two or more investment-focused employees dedicated to alternative assets.

"Many investors are becoming more sophisticated with how they access alternative assets, with most proactive in sourcing new investment opportunities," said Stuart Taylor, head of investor products with Preqin. "One of the main challenges that investors still face, however, is identifying the most appropriate funds that are in the market to make commitments to."