The latest AIMA/IPM-sponsored survey of Europe's largest institutional investors reveals that that interest in alternative investments is still on the rise.
Results from the Prospera Survey on "European Institutions´ Alternative
Investments" were released yesterday by Informed Portfolio Management (IPM) and AIMA, which commissioned the survey.
The results confirm that interest in alternative investments is still on the rise, particularly in regard to hedge funds and active currency management. The survey found regional variations among institutional investors in alternative strategies, with the largest interest coming from Dutch, UK and Nordic institutions.
Varying degrees of experience in alternative investments was observed between regions as well as between investors of different sizes.
This is the second annual survey conducted by Prospera on behalf of IPM and AIMA, the first having surveyed the Nordic investor community.
A total of 151 of Europe's largest institutional investors were interviewed between June and September 2004. The interviewees represented major pension funds, life insurance companies and foundations/trusts in Europe with combined assets of over EUR 1,500 billion.
Key findings include:
* Virtually all institutions invest in long-only equities and fixed-income. 40% of institutions invest in hedge funds. 80% have holdings in real estate, 60% in private equity and less than 10% in commodities.
* Over 50% have an active process for tactical allocation and 30% for currency management.
* By 2006, over 60% of institutions will be active in each of the alternative investment categories: hedge funds, private equity, currency management and tactical allocation.
* Institutions that invest in hedge funds and private equity have average allocations of 4% and 2%, respectively.
* With regard to active risk allocation, 75% of the risk is allocated to long-only equities and fixed-income, 15% to tactical allocation and about 5% each to hedge funds and active currency management. Only about half of the institutions responded to this question.
* For the largest institutions, most of the active risk is allocated to internal management whereas others mostly employ external managers. However, the largest institutions plan to allocate more active risk to external managers going forward.
* The largest institutions are more active in alternative investments, especially in tactical allocation and currency management, and this will likely persist going forward.
* Virtually all hedge fund investments are given to external specialists. This will continue as investors allocate more money to this area.
* For currency management, about 10% of all institutions employ external specialists today. By 2006 more than 30% say they will employ additional or new external currency managers.
* A similar but less pronounced trend is seen in tactical asset allocation with 20% saying they will hire additional or new external managers over the coming 2 years.
* Holland, Switzerland and the Nordic region are the markets with the greatest experience in hiring external specialist managers for alternative investments.
* Over the coming 2 years, the majority of investor activity in external management is expected to come from Holland and the UK, especially in hedge funds and currency management.
* As for external management selection criteria, a clear investment philosophy and experienced staff are considered most important. Also of importance are transparency, risk management and a good risk-adjusted track-record.
* Institutions that have employed external managers in alternatives are in general pleased with the performance, especially in currency management. Also perceived as positive is the fact that currency managers have low correlation to others and that specialist managers have succeeded where generalists have not.
* Funds of hedge funds are the most widespread type of hedge fund investment and this trend is likely to continue over the coming 2 years.