Alternative Investments not so 'Alternative' Anymore

December 3, 2007 ( - Results of a recent survey by Russell Investments indicate alternative investments - hedge funds, private equity, and real estate - are becoming more mainstream for pension funds, foundations, and endowments around the world.

Australian respondents predicted the average hedge fund allocation will remain at 4.1% over the next two years, but European respondents said they expect allocations to hedge funds to rise from 7.4% to 8.4% by 2009 while Japanese respondents predicted it will increase from 9.3% to 9.9%, according to a press release on the survey results.

The biggest jump in hedge fund allocations is expected by institutional investors in North America, where allocations to hedge funds are forecast to rise from 7.5% to 8.9% over the next two years.

Institutional investors in the United States, Europe, and Australia all said they expect hedge funds to return about 9% on average through 2009 while institutional investors in Japan expect an average hedge fund return of 4.6%, the release said.

Strategic allocations to private equity investments have increased in Europe, Australia, and Japan and fallen slightly in North America; however, all geographic areas forecasted allocation increases through 2009. The Russell survey found leveraged buyouts remained the most popular private equity strategy across the world among survey respondents and increased in commitments across all regions, except for a slight decline in Europe. The strategy dominates in North America, representing 71 percent of private equity commitments in 2007

Mean return expectations over the next two years for private equity worldwide vary between 8% and 13%, with the highest expectations coming from North American and European respondents.

The use of real estate as an investment strategy climbed worldwide over the past two years, but particularly in Japan where nearly 40% of respondents indicated they use real estate – up from one-in-five respondents in 2005. In North America, institutional investors anticipate their strategic allocation to private equity will increase from 6.7% in 2007 to 7.3% in 2009, led by an uplift in endowment and foundation allocations from 5.9% to 7.1% (See  Asset Mix: Get Real ).

European respondents indicated they expect strategic allocation to real estate to rise from 8.9% to 9.7%, with the greatest increase by respondents from the U.K. (from 9.1% to 10.2%). Australian respondents anticipate a similar rise from 9.6% to 10.5%, while Japanese respondents’ mean strategic asset allocation to real estate is expected to increase from 4.7% to 5.7%.

Looking for New Alternatives

As hedge funds, private equity, and real estate become more mainstream, respondents continue to explore new strategies to add to the alternative investment mix. In North America, the strategy most widely used (22%) and most widely considered (45%) is portable alpha.

Among strategies currently being employed by European respondents, currency overlay, absolute return, and infrastructure were mentioned most frequently. Among strategies actively being considered by European respondents, currency overlay, tactical asset allocation, portable alpha, and infrastructure were most frequently mentioned, the news release said.

The 2007-2008 Russell Investments Survey on Alternative Investing results are based on the detailed information provided by 326 organizations in North America, Europe, Australia, and Japan.