If alternative investments go mainstream, are they really alternative anymore? We'll find out in the next two years as greater numbers of pension funds, endowments and foundations plan to devote bigger chunks of their portfolios to private equity, hedge funds and real estate, according to the eighth global report on alternative investing from Russell Investments.
The 2007-2008 Russell Investments Survey on Alternative Investing report is based on responses from 326 tax-exempt institutions (public and corporate pension funds, endowments and foundations generally with assets of $1 billion or more) in North America, Europe, Japan and Australia regarding their participation in, and expectations for, core alternative investing strategies.
On the whole, these large investors plan to boost their alternative investments across the board with the exception of Australian institutional investors who expect to keep their mean strategic asset allocation to hedge funds steady.
Across the globe, respondents' return expectations are strongest for private equity, with expectations for hedge funds and real estate remaining steady. Mean return expectations for private equity worldwide vary between 8% and 13%, with North American and European respondents most bullish on this asset class.
The use of real estate as an investment strategy climbed worldwide over the past two years, particularly in Japan where utilization rose from 20% in 2005 to nearly 40% this year.
"Describing the use of private equity, hedge funds and real estate as 'alternative' is increasingly a misnomer in today's sophisticated investment environment," Jon Bailie, Russell's managing director of alternative investments. "Fund of funds remain the preferred route to access both private equity and hedge funds, with limited in-house investment resources dedicated to these strategies by even the world's largest institutions."
Leveraged buyouts remained the most popular private equity strategy across the world among survey respondents, and increased in commitments across all regions except for a slight decline in Europe. The strategy dominates in North America, representing 71% of private equity commitments in 2007.
"The private equity community witnessed enormous volumes of LBO activity over the past two years, but investors may have come to the conclusion that the best and biggest buyouts have already occurred," said Jay Pierrepont, Managing Partner, Pantheon Ventures-Russell Investments. "Institutional investors still have high expectations for private equity and are forecasting . . . double digit returns for the next two years."
Strategic allocations to real estate are forecast to increase in all regions over the next two years. In North America, institutional investors anticipate their strategic allocation will increase from 6.7% in 2007 to 7.3% in 2009.
Respondents continue to explore new strategies to add to the alternative investment mix beyond hedge funds, private equity and real estate. Many European respondents are either using or considering other forms of alternative investing strategies such as currency overlay, tactical asset allocation, portable alpha and infrastructure.
In North America, the strategy most widely used-as well as the most widely considered-is portable alpha, a hedging strategy aimed at boosting alpha.
The Russell Investments Survey on Alternative Investing is published biennially by Tacoma, Wash.-based Russell Investments.