Institutions Still Like Alternative Investments, but Are More Cautious

November 16, 2009 ( – A survey by Morningstar, Inc. and Barron's magazine finds that despite questionable performance during the market downturn and hedge fund scandals, institutional investors and advisers still view alternative investments optimistically, although with greater scrutiny.

More than 60% of institutions and advisers indicated that alternatives will be as important or more important than traditional investments over the next five years, according to a Morningstar press release. The majority of institutions and advisers expect alternatives to account for more 10% of their portfolios over the next five years, with a quarter of institutions expecting alternatives to account for more than 25% of their portfolios.

For both institutions and advisers, the top three reasons for investing in alternatives remain the same as in last year’s survey: portfolio diversification, absolute returns, and exposure to different investment techniques, like arbitrage or shorting. Institutions and advisers are much more concerned, however, about lack of liquidity and transparency than they were last year, the press release said.

Hedge funds were the most popular alternative vehicles over the last five years, and institutions and advisers expect to continue to increase allocations to hedge funds over the next five years.

Both institutions and advisers tend to classify investments as “alternative” based on the investment’s strategy (i.e. absolute return), rather than the investment’s designation (i.e. mutual fund versus hedgefund). Compared to the 2008 survey, fewer institutions and advisers view real estate investment trusts and commodities as alternative asset classes.

Morningstar and Barron’s conducted the Web-based survey in late September through early October 2009, among 89 institutions and 300 financial advisers. Survey results appear in the November 9 issue of Barron’s and online at Additional results, including charts, can be viewed online at