Institutional investors are increasingly turning to alternative assets to diversify portfolios as they navigate an environment characterised by low yields, geopolitical concerns and a growing set of investment risks, finds Allianz Global Investors, one of the world’s leading active investment managers, in its annual RiskMonitor survey.
Consisting of 755 institutional investors, representing USD34.2 trillion in AUM across North America, Europe and Asia-Pacific, the RiskMonitor survey found that seven out of 10 respondents said they now invest in alternative asset classes. Diversification is the No1 reason for these allocations, cited by nearly one-third (31 per cent) of investors – the most common driver of alternative allocations. Other reasons mentioned by respondents include a low correlation with other strategies (19 per cent), higher returns than conventional debt or equity instruments (17 per cent) and the potential for reducing overall portfolio volatility (11 per cent).
But the research finds that nearly half of investors (48 per cent) would invest more in alternatives if they felt more confident about measuring and managing any risks associated with these asset classes. This is particularly relevant for sovereign wealth funds (66 per cent) and banks (55 per cent), compared to pension funds (44 per cent), insurance (48 per cent), family office (47 per cent) and endowment and foundations (38 per cent). More than three-fifths (62 per cent) say they need better tools to manage the risks associated with alternative assets.
Margaret Frost (pictured), head of UK institutional, at Allianz Global Investors, says: “We are seeing alternative investments being increasingly deployed by institutional investors to solve a variety of diversification, income, and risk management needs.”
“Although it may seem mainstream for some investors, it’s still an underutilised asset class that could help investors meet the return objectives of their portfolios.”
Demonstrating the versatility of alternative investments, institutional investors weighed in with strategies they are using to achieve particular goals.
Real estate equity (30 per cent), infrastructure equity (30 per cent) and relative value/arbitrage strategies (24 per cent), among others, seem to be the most popular strategies for institutional investors when they are looking to diversify or invest in strategies that have low correlation to traditional asset classes.
Private corporate equity (49 per cent) is used to generate higher returns along with event-driven strategies (30 per cent) and infrastructure equity (27 per cent) while real estate and infrastructure debt (37 per cent) are considered to provide a reliable income stream.
For risk management, 23 per cent use relative value/arbitrage strategies, 20 per cent macro strategies, 16 per cent trading strategies and 14 per cent infrastructure debt.
A further 19 per cent use other illiquid alternatives in their efforts to manage risk.
Meanwhile liquid alternative strategies – trading strategies (22 per cent), macro strategies (17 per cent), event-driven strategies (17 per cent) – seem more popular when it comes to tail hedging.
The research underscores the potential benefits for investors of investing in alternatives. For example, nearly two-thirds (64 per cent) of those who allocate to alternatives feel prepared to deal with investment risks – compared with only 51 per cent of investors without alternatives allocations who feel similarly prepared.
Given that asset class diversification is the most popular risk management strategy among the respondents, this greater preparedness seems to stem from the role that alternative assets can play within these strategies. In addition, 44 per cent of investors said that alternative investments are necessary to protect a portfolio from tail risk.
