Global instos to increase alternatives exposure

Global institutional investors expect to recommit to alternative investments over the next two to three years, Russell Investments data reveals.

Real estate, private equity and hedge funds remain the preferred alternative types, with commodities and infrastructure also expected to increase substantially from their current low allocations, according to the Russell Investments 2010 Global Survey on Alternative Investing, which covered 119 institutional investors in North America, Europe, Japan and Australia.

Australian respondents favoured a higher allocation to infrastructure, commodities and real estate than their global counterparts, providing inflation protection and portfolio diversification, according to Nicole Connolly, director of alternative investments, Asia Pacific region.

Australian institutional investors’ real estate allocations have declined less than their global counterparts due to a high exposure to local real estate, which performed better than international property markets during the financial crisis, Connolly said.

“Alternatives have proved their role as portfolio diversifiers and risk mitigators during volatile markets, and we expect continued demand from institutional investors even if the global recovery were to falter,” Connolly said.

Ongoing demand is expected to drive increased use of research consultants with a focus on project based and asset allocation research, and due diligence on managers and investment funds.

Institutional investors indicated that the market volatility of the last two years had not altered their fundamental philosophy on alternatives, although 44 per cent said they already or would soon differentiate alternative investments by liquidity risk.

Of the surveyed firms, 84 per cent had made or planned to make changes to their governance and risk management approach, and more than one-third of those said they were increasing proprietary research on asset class or asset allocation strategies and specialised investments.