Goldman Sachs/Russell report shows rapid growth in allocations

The report focuses on alternative investing by tax-exempt institutions (public and corporate pension funds, endowments and foundations, and other funds) in North America, Continental Europe, the United Kingdom, Australia and Japan.

It shows that institutional investors throughout the world have remained committed to alternative investments while equity markets have been volatile.

Private equity, real estate and hedge funds continue to move into the mainstream and now hold an established place in many of the world’s largest institutional portfolios as these investors look for portfolio diversification and additional returns. Since the first survey in 1992, participation in each alternative asset class has continued to grow across all regions.

Major findings include:

Allocations to hedge funds rise considerably in all regions, indicating further acceptance of hedge funds as an investment approach.

Allocations more than doubled in Europe and Japan, and they are predicted to continue rising swiftly. 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 (from a low base). Worldwide, commitments to hedge funds by these institutions top USD 22 billion.

Nigel O’Sullivan, Managing Director at Goldman Sachs International’s Pension & Insurance Strategy Group, said: "Many institutional investors endorsed hedge funds in the past two years with new or significantly increased allocations and commitments."

Funds of funds are increasingly popular investment vehicles for private equity and hedge fund allocations in all regions.

In North America, for example, funds of funds comprise a steadily growing portion of private equity commitments, increasing from 2% in 1997 to 11% in this year’s survey. Similarly, the percentage of North American respondents investing in funds of hedge funds increased considerably from 29% in 2001 to 50% this year.

Investors have achieved solid returns for their alternative investments, and their return expectations going forward remain optimistic.

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.

In North America and Europe, commitments to private equity and real estate remain high.

Despite poor returns in the past few years, commitments to private equity among North American (Canadian and United States) respondents total USD 179 billion. Moreover, participation in private equity increased to 70% of respondents in 2003. 43% of European respondents currently invest in private equity, committing USD 16 billion to these investments.

Survey results reveal that real estate commitments are also substantial; in North America, real estate commitments are US$73 billion with 56% of respondents investing. European participation in real estate is 49%, with USD 42 billion in commitments.

North American and European institutions demonstrated their continued commitment to private equity and real estate by maintaining or increasing their strategic allocations to these investments. Moreover, institutions in all regions predicted their allocations to private equity and real estate would rise over the next few years.

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

Respondents worldwide revealed similar approaches to real estate investments, focusing on direct investments and investments in their respective regions.

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.

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 USD 360 million, whereas 20 had commitments to hedge funds totaling USD 2 billion and eight more reported plans to start investing in hedge funds in the next three years.

Goldman’s Nigel O’Sullivan said: "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. With each survey we discover institutions taking even greater advantage of the benefits provided by these investments."

About the Report

Since its inception in 1992, the Goldman/Russell Report on Alternative Investing has been an important tool for institutional investors in alternative investments – becoming a barometer for industry standards and investment levels. Published biennially and jointly by Goldman Sachs and Russell, the report helps investors broaden their knowledge about industry best practices, stay abreast of trends and structure their alternative investment commitments intelligently. The 2003 report focuses on determining, on a percentage basis, the types of alternative investments that are being used by investors, particularly the growth and composition of these investments, as well as geographic diversification.

The survey target list includes the largest pension funds, foundations and endowments (generally assets of USD 3 billion or more). The survey is given in an objective format and respondents are asked about their views and methodologies concerning alternative investments. The 2003 survey results are based on the detailed information provided by 325 organizations in North America, Europe, Australia and Japan.

Background Note: Goldman Sachs is a leading global investment banking, securities and investment management firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net worth individuals. Founded in 1869, it is one of the oldest and largest investment banking firms. The firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world.

Russell Investment Group, a global leader in multi-manager investing, provides investment products and services in more than 35 countries. Russell manages more than USD 85 billion in assets and advises clients worldwide representing more than USD 1.6 trillion. Founded in 1936, Russell is a subsidiary of Northwestern Mutual and is headquartered in Tacoma, Wash., with additional offices in New York, Toronto, London, Paris, Singapore, Sydney, Auckland and Tokyo.

copyright hedgeweek 2003