However, while existing investors have grown comfortable with their strategies and are now willing to expand and deepen alternative allocations – particularly “real assets” – the un-invested generally remain unconvinced of the merits.
Of the institutions surveyed this summer, 85 per cent of which were pension funds, 25 per cent invested in all three main alternative asset classes – real estate, private equity and hedge funds. Levels of investment in real estate and private equity have remained broadly unchanged in most European markets since the last JPMorgan survey in 2003 – although Nordic allocations to private equity have increased significantly.
However, the latest survey reveals a strong increase in hedge fund investment across Europe, where both the number of allocators and levels of investment have doubled.
Survey respondents intend to invest a further €103.6bn into alternative assets in the next two to four years, with 26 per cent of that heading for real estate, 16.5 per cent to hedge funds, 15.5 per cent to private equity, 14 per cent to infrastructure and 28 per cent to “other” alternatives such as commodities and currency management.
“Our research has demonstrated that the real mainstream alternative asset class is what we refer to as ‘real assets’,” said Jens Schmitt, head of institutional business for Continental Europe at JPMorgan Asset Management. “They include real estate, which is core in most portfolios today, and increasingly other physical assets such infrastructure, commodities and timber.
It is no wonder that given their protection from inflation, and low correlation to other assets, these alternatives offer highly attractive investments for pension funds.”
Current hedge fund investors have the most appetite to increase their allocation, with 63 per cent intending to do so, compared with 49 per cent of private equity investors and 30 per cent of property investors. Very few plan to reduce their alternative exposure.
But even as existing investors increase allocations, their expectations for future returns from alternatives are largely in line with or lower than returns achieved to date, and most would consider a 50 per cent allocation to be too risky.
Diversification is the key motivation for investing, and respondents were keen to spread their investments among several fund managers and favour highly diversified investment vehicles such as multi-strategy and fund of fund options, with a strong bias towards products domiciled in their own country or elsewhere in Europe. And the survey indicates that most institutions yet to invest appear to have little interest in doing so.
“The research suggests that investors remain divided in opinion as to the potential risk attached to investing in hedge funds and private equity, suggesting that they are not mainstream for nearly half of our respondents,” said Mr Schmitt.
MS
