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.
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.