According to the Greenwich, Connecticut-based consultant, institutional investment in private equity climbed from 3.6% in 2005 to 3.8% in 2006, and hedge fund investment increased to 2.1% from 1.9%. International equities saw the greatest increase from institutional investments, from 13.9% to 15%.
Institutions’ shift of some of their assets away from domestic equity and into such alternative investments suggests they may be getting more comfortable with taking on a little more risk to bolster returns, the report said.
The proportion of U.S. institutions investing in hedge funds rose to 36% in 2006 from 32% in 2005 and 29% in 2004, with endowments ranking as the biggest proportion. Nearly a quarter of corporate plan sponsors say they invest in hedge funds, up from 21% in 2005 and 19% in 2004. Public plan sponsors’ use of hedge funds grew slightly to 23% in 2006 from 22% in 2005, despite a falloff in allocations; however, 42% of public pension funds said they plan to significantly increase their allocations in these alternative investments.
Even thought there was a slight increase in private equity investment by institutions, it remains a “chronically underinvested” asset class, said Will Wechsler, a Greenwich consultant, in the news release.
He explained: “There is a lack of capacity relative to the amount of capital institutions would like to devote to the asset class, and where capacity does exist, it is generally outside of the relatively small number of fund managers that have historically generated the best and most consistent returns.”
Fixed income investment by institutions saw a 5% drop from 2002 to 2006, but was stagnant from 2005 to 2006; however, U.S. institutions are pulling back on allocations to domestic equities, with average allocations to domestic stocks declining to 44.7% of total assets in 2006 from 46.7% in 2005.
Greenwich Associates interviewed 219 public pension plan sponsors, 578 corporate plan sponsors and 266 endowments and foundations for the report.