Management Matters In Alternative Selection

June 12, 2003 ( - When it comes to picking an alternative investment manager, who you are - management capability - reigns supreme, according to a recent survey.

That criteria topped the list garnering a 7.0 median importance rating, while also pulling a 6.40 average score, both on a 7.0 scale, according to a  PLANSPONSOR survey of nearly 300 defined benefit plan sponsors on their attitudes and actions regarding the alternative investment class, defined as real estate, private equity, or hedge funds.  

That capability needn’t be coupled with the strength of a large organization, however.   Survey respondents evidenced no particular preference for dealing with a boutique shop versus a large institution, and most (77.8%) had no requirement that their hedge fund manager be of a certain size.

Track “Meat”

Track record was second most important, registering a 6.31 average importance score, while consistency of strategy was third.   Transparency, deal flow, terms, and diversification all fell into a second tier weighting group.  

Looking ahead, most survey respondents seem likely to maintain their current levels of alternative investment allocation.   However, one in five say they will increase the current commitment to hedge funds and a like number to private equity in the next year.   Significantly, more than a quarter (27.1%) say their hedge fund allocation will be higher three years from now – and nearly a third (30.8%) make a similar statement regarding their private equity investment.  

Plan sponsors are clearly looking for help in the selection process.   Roughly two-thirds of the nearly 300 survey respondents say they work with a consultant in evaluating these investments, and among those who do, two-thirds said they were “very likely” to act on their recommendations, while 23.6% said they were “somewhat likely” to do so.  

However, more than half (52.8%) of those who use consultants said they were not the only source used to identify alternative investment funds or managers.

Next Up:   What’s so hot about alternative investments?