According to new research from Cerulli Associates, institutions that were once able to meet their target returns by investing in mostly long-only equity or fixed income are being forced more into “risk assets.”

In particular, “alternative” investment classes are playing an increasingly important role in the effort to meet necessary portfolio returns, Cerulli finds.

“Across the U.S. institutional landscape, investors are feeling the impact of weak investment returns and the prolonged low-interest-rate environment,” Cerulli reports. “As the pressure to meet assumed return targets continues for all types of institutional asset owners, many investors have been forced to look at different options in an attempt to reach their desired objectives.”

According to Cerulli, institutions have at the same time “begun exploring a variety of ways to make their portfolios more efficient.” Chris Mason, senior analyst at Cerulli, suggests much of the focus has been on ways to reduce administrative costs as well as investment management costs, including the fees paid to third-party managers.

“Insourcing is one of the ways in which some institutions have attempted to reduce their investment management costs,” Cerulli researchers explain. “Institutions choose to bring investment management responsibilities in-house for a portion of the investment portfolio to save on costs of external management, particularly in traditional equity, fixed income, and derivatives instruments.”

Of course, there are additional expenses to consider with this model, such as technology upgrades, as well as systems to handle portfolio management and administrative capabilities.

“Insourcing is considered most common for larger institutional investors, but there is no minimum size necessary,” says Mason.

NEXT: Cost cutting can be complicated 

The Cerulli report goes on to argue that insourcing and outsourcing both have important applications for different types of institutional investors.

“One of the major advantages of outsourcing investment responsibilities is a faster decision-making process and the transfer of monitoring responsibility that can free up time for professionals to focus on their organizations," adds Mason. “Despite the many benefits of outsourcing, providers and investors still have a variety of concerns, such as potential conflicts of interest for firms that offer proprietary products or strategies.”

Another popular way that institutions have tried to mitigate investment management fees is through passive investing, the Cerulli report shows. Although many institutional asset managers indicate that competition with passive management is “very challenging” to growing institutional assets, Cerulli believes the use of passive investments compared to active investments is “not the either/or proposition it has become among individual investors and retirement plans.”

In fact, after several years of strong inflows, recent data suggests institutional demand for passive strategies may be easing, Cerulli concludes.

These findings are from Cerulli's latest report, “U.S. Institutional Markets 2016: Reassessing Opportunities for Growth Across Multiple Institutional Asset Pools.” More information is available here.