Institutional Investors Plan to Increase Alternative Investment Holdings

The Russell Investments 2010 Global Survey on Alternative Investing found institutional investors expect on average an increase of over a third (from 14% to 19%) in their allocation to alternatives over the next two to three years. A press release said real estate, private equity and hedge funds remain the preferred alternative types, although commodities and infrastructure are expected to make meaningful gains from their current low allocations.  

The survey also found 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 decisionmaking and governance processes. At the same time, their awareness of the role alternative investments play in portfolio diversification and risk management has increased.  

“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. 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,” said Janine Baldridge, head of global consulting and advisory services, in the press release.  

Institutional investors indicate that the market volatility of the last two years has not altered their fundamental philosophy on alternatives; however, they do appear to be modifying their approach. More than half (58%) of respondents agreed that their philosophies/strategies had not changed as a result of the financial crisis, versus 28% who disagreed; yet, 44% said they already – or soon will – differentiate alternative investments by liquidity risk.   

In addition, 84% of surveyed firms have made or plan to make changes to their governance and risk management approach. 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.   

Among the 84% of firms who plan to make changes in their risk management approach, over 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.

Findings by Region  

The Russell Investments 2010 Global Survey on Alternative Investing found 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. Expectations for 2012 are not as robust in either Europe (3.7% share expected) or Japan (2.5%). In Australia, private equity allocations were reported at 3.5% for 2009, with little increase expected in 2012.   

Overall, survey respondents 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.   

For 2009, real estate's share of the total investment portfolio for institutional investors responding to the Russell survey stood at 4% in North America, 4.9% in Europe, and 2.7% in Japan. Respondents are expecting valuation-driven increases by 2012 in each of these regions. 

The 2010 survey results are based on detailed information provided by 119 organizations in North America, Europe, Australia, and Japan.  

The full survey report can be downloaded from here.