The survey, conducted by Morningstar, Inc. and Barron’s, found that “both institutions and advisors want alternative investments that are liquid, transparent, and regulated like traditional investments,” said Steve Deutsch, director of separate accounts and collective investment trusts at Morningstar.
Survey respondents, asked to identify the top three reasons to hesitate to invest in alternatives, cited:
- 54% – lack of liquidity
- 46% – lack of understanding
- 45% – lack of transparency
“This demand is driving the convergence of traditional and alternative money management. We’re seeing more alternative investment strategies in mutual funds and ETFs, higher prevalence of retail and alternative money managers competing for assets under management, and traditional money managers acquiring, merging with, or recruiting alternative investment expertise.”
A third of institutional investor respondents thought that alternative investments would become as important as traditional investments over the next five years, while 17% thought they would become somewhat more important, and 13% “much more important.” On the other hand, nearly a quarter thought they would become much less important (13% said somewhat less important).
Among the survey’s other findings:
- Limited partnerships, including hedge funds, direct real estate, and private equity, are the most popular alternative vehicles for institutions.
- Almost half of institutions surveyed allocate more than 10% of their portfolios to alternative investments, and nearly one-in-five allocate more than a quarter of their portfolios to alternatives.
- Institutions generally expect their portfolio allocations to alternative investments, particularly hedge funds and private equity, to increase over the next five years. In fact, close to a quarter (23%) of institutions expect to invest more than 25% of their portfolios into alternatives.
The survey also noted that the “previous excitement seen over 130/30 and all manner of leveraged net-long investment strategies appears to have diminished.” In fact, more than 70% of institutions expect assets invested in leveraged net-long strategies to remain unchanged in 2009.
The survey, which included the perspectives of 252 institutional investor respondents identified the following categories as "alternative" investments:
- 83% - infrastructure
- 86% - investments linked to natural resources
- 87% - managed futures
- 94% - private equity/venture capital
- 96% - hedge funds
Other alternative categories included; distressed debt/mezzanine debt/distressed equity, volatility, carbon emissions, swaps (interest, credit), and socially conscious/responsive stocks.
As for which categories might get increased allocations over the next five years, institutional investors cited:
- 25% - hedge funds
- 18% - private equity/venture capital
- 10% - other
- 7% - capital protected/structured
Distinctly not "alternative" in the opinion of survey respondents were:
- REITS (71% of institutional respondents said these were not "alternative" investments)
- emerging market bonds (79%)
- Treasury inflation-protected securities (80%)
- emerging market stocks (79%)
- international small caps (86%)
Morningstar and Barron's conducted the Internet-based survey in October 2008; 252 institutions and 1,180 financial advisors participated.
Further survey results, including charts, can be viewed online at global.morningstar.com/2008Alternatives.
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