Institutional Investors Warming Up to Alternatives

There’s been an uptick in global demand for diversification and alpha generation, according to the 2012 Global Survey on Alternative Investing by Russell Investments.

Institutions participating in the survey currently have, on average, 22% of total fund assets in alternative investments. Diversification was cited as one of the top three reasons for using alternatives by 90% of respondents, while volatility management and low correlation to traditional investments was mentioned by 64%, and return potential was noted by 45%.   

Additionally, the majority of respondents indicated that allocations would remain static or increase over the next one to three years across all alternatives categories. Thirty-two percent of respondents expect to increase their investment in hedge funds and private real estate, 28% in private infrastructure, 25% in private equity (PE), 20% in commodities, and 12% in public real estate and public infrastructure.   

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At least 30% of respondents indicated they were below their target weights in hedge funds, private real estate and private equity, while traditional investments – cash, fixed income and equities – were more frequently over their target allocation than under their target allocation. Cash, specifically, is over-target for 45% of respondents, which may indicate that they are being cautious about taking risk and waiting for the right time to reposition cash.   

Forty-nine percent of respondents who participate in hedge funds currently utilize the fund of funds structure approach. This is more than double the percentage of that for any other hedge fund implementation method, however, this year’s survey shows respondents anticipate making shifts away from the traditional fund of funds model. Only 17% of respondents using hedge funds expect to utilize this traditional structure for implementation over the next one to three years.   

While fund of funds vehicles are anticipated to lose ground, all other implementation methods are expected to gain. Additionally, 63% of survey respondents are obtaining customized hedge fund solutions to complement existing exposures, pursue niche opportunities and access strategy-specific expertise. 

 

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Consistent with previous surveys, private equity is more prevalent in North American portfolios, although Europe is not far behind. In both North America and Europe, more investors are currently committed to small/medium buyout funds than to larger funds. Significantly, both North American and European investors expect small to modest decreases in their current PE commitments over the next one to three years. Co-investments and alternative energy are expected to show the largest increases in commitments over the same time period.   

Listed real estate investment trusts (REITs) and unlisted private real estate funds continue to dominate as implementation choices, with 51% of the respondents (who hold real estate currently) using them. Only 38% of these respondents, however, said real estate funds will continue to be an implementation choice in the next one to three years. Allocations to direct property investments (23%) and customized separate accounts (15%) are expected to rise in the near future.   

Even with inflation-sensitive characteristics, commodities remain a niche solution and future possibility (more than a current reality) for most institutional investors. Among the small sample of survey respondents who hold commodities (32 in number), long futures exposure is the most popular type of investment (63%), with private equity (44%) and hedge funds (28%) trailing. Long/short strategies and funds have not yet made much of an impact (23%), but interest in them is rising, with 46% of current commodity investors expecting to add long/short over one to three years.  

Although public and private infrastructure investments command only a small share of institutional assets (just 1% of the combined asset allocations of all respondents), many signs point to growth. Private infrastructure investments appear to be attracting a growing portion of institutions’ illiquidity budgets, perhaps taking assets away from private equity.

 

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Boards and trustees are demanding more education about alternatives and are becoming more receptive to proposals that have included education. Given the dynamic nature of the alternative investment marketplace, 36% of respondents indicated that additional education about alternatives is needed within their organizations.   

Russell has observed a growing respect among North American (NA) investors for comprehensive due diligence since its 2010 Survey. In the 2012 Survey, 91% of NA investors said they require comprehensive operational due diligence before making new investments (vs. 68% globally). Responses to this line of questioning signal a trend in institutional investors’ approach to working with external resources. Even some sophisticated investors have decided that they could better achieve their investment objectives by combining the expertise of internal and external resources to manage multi-strategy alternatives.  

Between January and March, 146 institutional investors in North America, Europe, Australia and Japan representing a total of $1.1 trillion in assets completed the online survey.  

More information is here.

 

Five More Years of Work Needed to Be Retirement Ready

Most workers need to work only five years past age 65 to be ready to retire, a paper contends.

The Center for Retirement Research at Boston College used the National Retirement Risk Index (NRRI), which measures the share of American households “at risk” of being unable to maintain their pre-retirement standard of living in retirement, to determine at what age the vast majority of Americans would be able to retire. The analysis found more than 85% of households would be prepared to retire by age 70.  

Nearly half of households are prepared for retirement at age 65, the traditional baseline assumption used in the NRRI. About one-quarter of households have to work just one to three years beyond age 65, and a portion of this increase would be offset by rising longevity over the next two decades. Only 9% have to work an additional seven years or more.  

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The paper explained that the steep improvement in retirement readiness from ages 62 through 70 and the leveling off thereafter reflect the importance of Social Security and the pattern of its benefit payments. Social Security benefits increase by about 8% per year between ages 62 and 70, due to the actuarial adjustment before the full retirement age of 66 and the delayed retirement credit between 66 and 70.  

The researchers also noted that younger households tend to be less prepared for three main reasons: they are expected to live longer, which means they will need additional assets to cover a longer retirement period; Social Security replacement rates tend to be slightly lower for younger households because they face a higher full retirement age; and fewer younger households will be covered by defined benefit pension plans.  

Today’s workers may need to work longer than their parents, but they are also healthier, better educated, generally have less physically demanding jobs, and can expect to live longer, the report pointed out. “In short, working longer is feasible for most households, and it does not mean working forever,” the researchers concluded.  

The report can be downloaded from here.

 

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