Plan Sponsors Keen on Alternative Investments

June 11, 2003 ( - The sustained state of flux in the investment markets is beginning to severely impact how plan sponsors view and choose alternatives, though it has not yet resulted in massive infusions of capital, according to new research.

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.”

Ceiling Fans?

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.