Earlier this year, PLANSPONSOR solicited feedback from defined benefit plan sponsors on their attitudes and actions regarding the alternative investment class. Nearly 40% of almost 300 survey respondents already have made a commitment to alternative investments, defined as hedge funds, real estate, or private equity; and the vast majority of those (86%) categorized the commitment to those classes as “permanent,” rather than “opportunistic” or “defensive.”
Most (82.2%) had a ceiling on the level of investment in the class (14.6% on average, with a median response of 10.0%), and most (81.3%) outsourced management of alternatives. More than three-quarters of those with an alternative investment allocation had invested in the class for more than five years, and most (58.9%) had increased that allocation over the past five years. The allocation had remained the same over that period for 29%, while only 12% decreased their allocation.
For the most part, those with an allocation to alternatives were happy with the decision. Nearly half (48%) said that they were “somewhat satisfied” and that alternatives would continue to play a role in the portfolio, while 41% said they were “very satisfied.” Roughly one in five were neutral.
When hedge funds were present, they tended to command a greater allocation than either of the other two classes. The average allocation to hedge funds was 10.7%, and the median allocation to the class was 8.5%, compared to just 6.7% and 5.1% for private equity, and 7.1% and 6.0% for real estate.
Alternative investments generally – and hedge fund investments in particular – seem likely to continue to play a growing role on plan sponsor radar screens. Still, while hedge fund assets under management have grown staggeringly quickly (from $187 billion at year-end 1993 to $600 billion at year-end 2002, estimates Hedge Fund Research of Chicago), only a small portion of this growth has to date come from institutional investors.
Tomorrow: Picking an alternative investment manager.