GLOBAL - Institutional investors expect to boost allocations to most alternative strategies in the next three years, and increasingly favour customised approaches, according to a new survey.
Diversification and shelter from volatility are cited as the main reasons for investing in alternatives, in an international survey on alternative investing from Russell Investments.
Julia Cormier, director of alternative investments at the asset manager, said: “In an environment characterised by low returns, a high level of global economic uncertainty and financial market volatility, alternatives are a critical component of a diversified, multi-asset portfolio.”
Cash was under target for 45% of the survey’s respondents, and this, the asset manager said, could indicate investors are being cautious and waiting for the right time to reposition.
Excess cash could potentially be channelled into under-target alternatives in future, it said.
Hedge funds and private real estate appeared the most likely recipients of the extra money, with 32% of respondents saying they may make increased allocations to these asset classes.
At least 30% of participants said they were below target weight in hedge funds, private real estate and private equity.
Traditional investments - cash, fixed income and equities - were more frequently over the target allocation than under it.
In hedge fund investing, institutions seem likely to move away from the fund-of-funds approach.
At the moment, 49% of survey participants with hedge fund investments use funds of funds.
But only 17% said they expected to be using this traditional structure for implementation over the next 1-3 years.
While fund of funds vehicles were expected to lose ground, Russell Investments said all other implementation methods were likely to gain.
Within real estate investment, funds look set to lose popularity.
While 51% of respondents with property investments used real estate investment trusts (REITS) and unlisted private real estate funds now, only 38% said they would choose to implement through property funds in the next 1-3 years.
Allocations to direct property investments (23%) and customised separate accounts (15%) were expected to increase in the near future, the survey revealed.
Now that institutions had more experience investing in alternatives, they were increasingly taking the lead on implementation methods, Russell Investments said.
Darren Spencer, director of alternative investment consulting for North America, said: “Today, there is greater appetite for customised solutions in which investors can target specific risk/return outcomes, achieve more targeted strategy exposures and be more opportunistic with their investments.”