Russell: Hedge Fund Gains Continue Boosting Alt. Investment Commitments

September 12, 2005 ( - Lead by across-the-board increases in hedge fund investments, institutional investors are likely to further embrace alternative investments to the point where their commitment is at record levels within 24 months, a new study said.

A study of alternative investing trends by the Russell Investment Group found that institutional commitments to hedge funds, private equity and real estate are all forecast to rise, a news release said. Survey results show hedge fund use continues to increase most dramatically across all regions, and, in North America, the commitment to hedge funds has doubled, as represented by their growing share of overall allocations to alternative investments, Russell found.

The news release said other survey findings included:

  • the number of institutional investors using alternative investments climbed in 2005, particularly due to significant increases in Europe, Australia and Japan
  • hedge funds have led much of the surge in alternatives, as a growing number of institutional investors use this investment and dedicate an ever-larger amount of money to this category. Hedge fund use continues to increase dramatically across all regions, particularly outside North America.
  • return expectations are strongest for private equity as the surveyed institutions across all regions are forecasting over 10% for this category. In contrast, institutional investors in North America and Europe have slightly lowered their forecasts for hedge fund returns even as they add more of these investments to their portfolios.

“Real estate, private equity and hedge funds require a skill set and mindset different from the more traditional equity and fixed-income investing, and institutional investors have become increasingly comfortable with these demands,” said Tom Hanly, chief investment officer for Russell Investment Group in the news release.

Following are more survey details:

Compared to 2003, hedge funds have captured a growing share of allocations to alternatives across most regions, particularly in Australia, where they now account for 13%, up from 1% in 2003. In North America and Europe, hedge funds now account for 10% of the overall allocation to alternatives, roughly double the 6% and 5% levels found in 2003 respectively. Between 2003 and 2005, the percentage of institutional investors using hedge funds grew from 23% to 27% in North America.  By 2007, institutional investors in North America expect to dedicate 9.1% of their portfolio to hedge funds, an increase from 7.7% for 2005.

Hedge funds of funds have convincingly become the investment vehicle of choice for hedge fund allocations. Among North American investors using hedge funds, 91% now invest in hedge funds of funds, while only 41% of tax-exempt institutional investors invest in single hedge funds – a substantial drop from the 82% and 83% seen in 2001 and 2003 respectively.

Allocations to private equity are forecast to reach new highs in all markets in 2007, with markets that have traditionally had lower allocations to private equity (Europe and Japan) showing the largest expected increases. Institutional investors in all regions except Australia anticipate raising the percentage of their total assets invested in real estate in 2007. In North America, the forecast rises from 6.7% in 2005 to 7.3% in 2007.

The 2005 survey results are based on the detailed information provided by 327 organizations in North America, Europe, Australia and Japan. More information including an executive summary is  here .