A growing trend

fund allocations by major institutional investors have been growing in Australia over the past three years and are likely to continue growing, according to the latest research conducted by Russell Research into alternative investments.

The survey, which looked at institutions in Australia, Japan, North America and Europe, painted a positive picture in Australia where alternative asset classes are concerned, particularly for hedge funds — something which appears to reflect continuing uncertainty about long-term share market returns.

The Russell Survey analysis notes that the data “reflects a greater reliance on hedge funds to boost returns and increase portfolio diversification”.

“Clearly, institutional investors, still mindful of the precipitous three-year market down-turn that began in 2000, remain wary of stocks,” the analysis said. “Anticipated higher interest rates are making them leery of bonds, too.”

“Added to their concerns are forecasts that the return premium for stocks over bonds in the next decade might be as low as three per cent,” it said. “They still believe in active money management and the ability of hedge fund managers to extract alpha from inefficient markets around the world.”

Looking specifically at Australia, the Russell survey said that average strategic allocations to hedge funds had increased from 4.3 per cent in 2003 to 6.2 per cent in 2005, while allocations to private equity and real estate had dropped slightly.

However, it said that allocations to private equity and hedge funds were expected to increase by 2007, with real estate allocations decreasing slightly.

The research said that in Australia, long/short and multi-strategy funds each accounted for nearly 50 per cent of committed hedge fund assets, while private equity commitments to special situations had nearly doubled since 2003, accounting for 35 per cent of private equity assets.

“Real estate continues as the most popular alternative investment in Australia, used by 86 per cent of the respondents,” it said. “Not far behind is private equity, which continues to grow in usage and is now used by nearly three out of four Australian respondents.”

The survey said that while hedge funds came a distant third, their use had experienced dramatic growth since 2001 and were now used by a third of Australian respondents.

It said direct real estate ownership continued to account for half of real estate commitments.

Commenting on the survey outcome, Russell Investment Group’s managing director, institutional investment services, Stephen Roberts said it painted a very clear picture, with alternative investing continuing to grow at a strong pace world wide.

“Hedge funds will continue to garner the greatest share of increased commitments, and the smaller markets will increase their alternative investments significantly compared to more mature markets,” he said.

“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.”

Roberts said the report had shown that real estate continued to be the most popular alternative investment in Australia, used by 86 per cent of respondents.

“Close behind is private equity, which continues to grow in usage and is now used by nearly three out of four Australian respondents,” he said.

Looking at the global take-up of hedge fund investments, Roberts said that they had captured a growing share of allocations to alternatives across most regions, but particularly in Australia, where they now account for 13 per cent, up from 1 per cent in 2003.

“Between 2003 and 2005, the percentage of institutional investors using hedge funds grew from 23 per cent to 27 per cent in North America, from 21 per cent to 35 per cent in Europe, and from 18 per cent to 32 per cent in Australia,” he said.

The research said that hedge funds of funds had convincingly become the investment vehicle of choice for hedge fund allocations.