Worldwide Investors Still Commit to Alternative Investments

November 11, 2003 ( - Institutional investors in North America increased their private equity holdings to $179 billion in 2003, as worldwide alternative investments remained an attractive choice in the face of unstable equity markets.

The increase by North American institutions comes as 70% of the United State and Canada respondents to the Goldman Sachs International and Russell Investment Group global report on alternative investing report utilizing private equity.   Comparatively, only 43% of European respondents reported similar investment positions, committing a total of $16 billion to these investments.  

Also reporting strong positions are real estate investments.   In North America real estate commitments made up $73 billion of the aggregate institutional investor portfolio with 56% of respondents making such investments.   In Europe, participation in real estate is 49% with $42 billion in commitments.

Overall, investors appear focused on direct investments and investments in their respective regions.   For example, investors in North America, Europe and Australia have more than half their capital committed to direct investments in land and buildings. Over half of North American and European respondents indicated that they intend to invest only in their home regions.

“Among the largest institutions, despite tumultuous markets, private equity and real estate allocations are surprisingly stable,” said Hal Strong, president and managing director of alternative investments at Russell.

Hedging Bets

Echoing these results are the increased acceptance of hedge funds as suitable investment alternatives across the globe.   Worldwide, commitments to hedge funds by institutions in North America, Europe and Japan now top $22 billion as participation in hedge funds increased to 25% of respondents worldwide from 17% in 2001. Commitments also increased substantially, up 40% in North America, 65% in Europe, and 200% in Japan.

Not surprisingly then,hedge funds remain more popular than private equity with Japanese respondents. Of the 49 survey respondents in Japan, only six reported commitments to private equity for a total of $360 million, whereas 20 had commitments to hedge funds totaling $2 billion and eight more reported plans to start investing in hedge funds in the next three years.

Increasing in popularity among hedge funds are funds-of-funds for private equity and hedge fund allocations in all regions. Taking a look atNorth America, for example, funds of funds comprise a steadily growing portion of private equity commitments, increasing to 11% in this year’s survey from 2% in 1997. Similarly, the percentage of North American respondents investing in funds of hedge funds increased considerably to 50% in 2003 from 29% in 2001.

Overall, the moves appear to have paid off.   Median annualized returns forecasts for North America among respondents was 12% for private equity, 10% for hedge funds and 9% for real estate. European respondents expect 11% for private equity, 7% for hedge funds and 7% for real estate. Australians expect 10% for private equity and 8% for real estate.

“It is clear from the 2003 survey results that alternative investments are an increasingly important part of institutional investment portfolios in markets around the world,” said Nigel O’Sullivan, Managing Director at Goldman Sachs International Pension & Insurance Strategy. “With each survey we discover institutions taking even greater advantage of the benefits provided by these investments.”