Alternative investments have really hit prime time in the past five years. According to a new survey of U.S. institutional investors, by Natixis Global Asset Management, 74 percent have changed their approach to risk management and now consider the use of alternative investments essential to diversify portfolio risk.
Sixty-four percent of U.S. institutional investors say that traditional diversification and portfolio construction techniques need to be replaced and 72 percent no longer consider conventional 60/40 portfolios to be the best way to pursue returns. About 64 percent said that increasing allocations to non-correlated assets and increasing the use of liquid alternatives (68 percent) are effective strategies for managing portfolio risk.
“Years of market instability have U.S. institutional investors on edge,” said John Hailer, CEO of Natixis Global Asset Management in the Americas and Asia. “In their view, markets are driven more by economic and political events than by fundamentals. As a result, decisions are often made for defensive reasons. What U.S. institutional investors are looking for now are better responses to manage volatility risk.”
European market risk and fiscal shortfalls and regulatory uncertainty are two of the main sources of market volatility in the next two years. Survey respondents were asked what the highest threat was to meeting institutional investment objectives. Forty percent of them cited global equity market risk, with global fiscal imbalances ranked second at 36 percent.
Eighty-five percent of investors believe there will be a tightening of regulatory restrictions on financial institutions and capital markets participants, regardless of the outcome of the U.S. elections, the study found.
Of the survey respondents who invest in alternative investment products, such as hedge funds, private equity and alternative mutual funds, 88 percent are pleased with the performance of their investments. Ninety-three percent said if they had the choice to make all over again, they would increase their allocation to alternatives or invest the same amount, and just 7 percent said they would decrease their allocation.
Natixis surveyed 151 U.S. institutional investors for its online survey in June and July 2012. They manage assets on behalf of corporate and public pension funds, endowments and foundations, insurance reserves/liabilities and sovereign wealth funds.