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Russell Investments Global Survey: Alternatives become mainstream
- Institutional investors worldwide plan to increase portfolio allocations to alternatives over the next two years
- Institutions believe private equity returns will increase, while hedge funds and real estate returns will remain steady
Since 1992, we have surveyed large tax-exempt institutions in North America, Europe, Japan and Australia to gauge their participation in and expectations for core alternative investing strategies. The current survey results, based on responses from 326 organizations worldwide, are detailed in the 2007-2008 Russell Investments Survey on Alternative Investing. The report presents data by region, investment category and type of institution and includes detailed analysis of use of investment strategies, investment types, geographic allocation and expected returns.
Global findings:
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- Globally, respondents predict their strategic allocations to hedge funds will increase by 2009, except in Australia where the hedge fund allocation is anticipated to remain steady.
- Strategic allocations to private equity increased in Europe, Australia and Japan and fell slightly in North America. All geographic areas forecast allocation increases through 2009.
- Across the globe, respondents' return expectations are strongest for private equity, with expectations for hedge funds and real estate remaining steady.
- The utilization of real estate climbed worldwide over the past two years, particularly in Japan.
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 "Describing use of private equity, hedge funds and real estate as 'alternative' is increasingly a misnomer in today's sophisticated investment environment. Our survey highlights systematic use of these strategies to enhance returns, reduce volatility and improve fund governance through diversification," said Jon Bailie, Managing Director, 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. With outsourcing gaining traction across the globe, consultants continue to have an important role to play."
Strategy overview
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- Hedge fund allocations expected to rise in nearly all regions.
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 "Worldwide, hedge funds have matured as an investment tool for diversifying portfolios and reducing risk," said Victor Leverett, Director, Hedge Funds.
"As more and more players enter the hedge fund marketplace, institutional investors are turning to consultants to help them select hedge fund providers and better understand the esoteric strategies they often employ. Consultant use rose by 25 percentage points from the last survey in North America, 32 in Australia and 20 in Japan while remaining stable in Europe."
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- 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.
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 "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, with the exception of Japanese respondents' expectations for 2007 and 2008, double digit returns, for the next two years derived predominately from venture capital and secondary opportunities."
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- Strategic allocations to real estate are forecast to increase in all regions over the next two years. Institutional respondents across the world seek to diversify their real estate commitments outside of their local region.
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 "Real estate continues to play an integral role in institutional portfolios," said Karl Smith, Director, Real Estate. "Respondents around the world plan to increase allocations through 2009, with many respondents expressing interest in globally diversified real estate investments with access through private real estate funds and more liquid publicly traded real estate securities (REITs)."
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- Worldwide, respondents continue to explore new strategies to add to the alternative investment mix beyond hedge funds, private equity and real estate.
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Many European respondents are either using or considering other forms of alternative investing. Among strategies currently being employed, currency overlay, absolute return and infrastructure were mentioned most frequently. Among strategies actively being considered, currency overlay, tactical asset allocation, portable alpha and infrastructure were most frequently mentioned.
In North America, the strategy most widely used – as well as the most widely considered – is portable alpha (currently used by 22 percent of survey respondents and under consideration by a further 45 percent). Currency overlays ranked highest in Europe, Japan and Australia with 41 percent, 38 percent and 53 percent respectively, of institutional respondents currently using this strategy. In Australia, infrastructure investments tied currency overlay also with 53 percent of survey respondents.
We invite you to request the complete 102-page survey
Contact Rob or Gerry to learn more about our capabilities with alternative investing.
Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any
type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
This is not an offer, solicitation, or recommendation to purchase any security or the services of any organization.
Please remember that all investments carry some level of risk. They do not typically grow at an even rate of return and may experience negative growth.
Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets.
In general, alternative investments involve a high degree of risk, including potential loss of
principal; can be highly illiquid and can charge higher fees than other investments. Hedge
strategies and private equity investments are not subject to the same regulatory requirements as
registered investment products. Hedge strategies often engage in leveraging and other
speculative investment practices that may increase the risk of investment loss.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or any specific investment.
Specific sector investing such as real estate can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments. Fund investments in non-U.S. markets can involve risks of currency fluctuation, political and economic instability, different accounting standards and foreign taxation.
USIRC4052
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