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Institutional investors look to alternatives for diversification and alpha, says survey

Institutional investors across the globe are demonstrating significant demand for alternatives to support investment objectives such as diversification and alpha generation, and these expanding allocations are spurring greater interest in customised, investor-driven implementation approaches, according to the 2012 Global Survey on Alternative Investing released today by Russell Investments.

In 2010, when Russell last surveyed institutional investors, including corporate and public defined benefit plans, corporate defined contribution plans, non-profits and superannuation funds, attitudes about alternatives were in flux as institutions were still adjusting to the repercussions of the global financial crisis across their entire portfolios. This latest edition, the tenth issuance of the biennial survey, focused on the key drivers, barriers, influencers and implementation methods that are shaping alternative investment strategies, and the findings suggest that investors are reflecting a greater sense of calm, mixed with prudent caution.

"Since 1992, the Russell Global Survey on Alternative Investing has provided an important view into the changing nature of institutional perspectives regarding alternative investments," says Julia Cormier, director, alternative investments. "In an environment characterized 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. In expectation of continued volatility and market shocks, institutions are trying to shepherd their portfolios by structuring them to prudently manage risk, even as they also seek to achieve returns in a variety of potential market environments."

Institutions participating in the Survey currently have significant allocations to alternative investments — on average, 22% of total fund assets. 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, 20% in commodities, and 12% in public real estate and public infrastructure.

"Alternatives can play a unique role in helping organisations achieve their desired investment outcomes, and in today’s dynamic alternative investment marketplace, institutional investors are using alternatives in multiple ways. At the same time, the factors that influence institutional investors as they evaluate and make decisions about alternatives continue to evolve," said Darren Spencer, director, alternative investment consulting, North America. "With greater experience and expanding allocations, investors are increasingly driving implementation approaches. Today there is greater appetite for customized solutions in which investors can target specific risk/return outcomes, achieve more targeted strategy exposures, and be more opportunistic with their investments. This kind of fundamental shift in alternative investment implementation can provide a rich source of portfolio flexibility."

The Survey also found that investors face a myriad of challenges in assessing the range of alternatives across the expanding spectrum of opportunities, so education is an important component for integrating alternatives into multi-asset portfolios.


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