Institutional investors are cautious in the current economic climate and want alternative investment options, says a survey by Russell Investments.
The vast majority of survey respondents (90%) cited diversity as their main reason for using alternatives. Over half (64%) listed volatility and low correlation to traditional investments, and 45% say it’s about return potential.
In 2010, when Russell last surveyed institutional investors, attitudes about alternatives were in flux as institutions were still adjusting to the repercussions of the global financial crisis across their entire portfolios. Russell says that this year’s survey findings suggest that investors are now reflecting a greater sense of calm, but mixed with prudent caution.
“In an environment characterized by low returns, economic uncertainty and market volatility, alternatives are a critical component of a diversified, multi-asset portfolio,” says Julia Cormier, director, alternative investments at Russell Investments. “In expectation of continued volatility and market shocks, institutions are trying to shepherd their portfolios by structuring them to prudently manage risk, even as they also seek to achieve returns in a variety of potential market environments.”
Institutions are structuring portfolios to manage risk as volatility continues, she adds. One-third (32%) expect to increase their investments in hedge funds and private real estate. Others are looking at private infrastructure (28%), private equity (25%), commodities (20%), and public real estate and infrastructure (12%)
Other key findings from the 2012 Global Survey on Alternative Investing include the following:
- 63% of respondents are obtaining customized hedge fund solutions to complement existing exposures, pursue niche opportunities and access strategy-specific expertise;
- North American and European investors expect small to modest decreases in their current private equity (PE) commitments over the next one to three years;
- 51% of those who hold real estate use listed Real Estate Investment Trusts (REITS) and unlisted private real estate;
- 38% say real estate funds will continue to be an implementation choice in the next one to three years;
- Long futures exposure is the most popular type of investment for commodities (63%), with private equity (44%) and hedge funds (28%) trailing;
- 36% say additional education about alternatives is needed within their organizations.
“With greater experience and expanding allocations, investors are increasingly driving implementation approaches,” said Darren Spencer, director of alternative investment consulting with Russell Investments for North America. “Today there is greater appetite for customized solutions in which investors can target specific risk/return outcomes, achieve more targeted strategy exposures, and be more opportunistic with their investments. This kind of fundamental shift in alternative investment implementation can provide a rich source of portfolio flexibility.”