| Alternatives do not scare investors away anymore |
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| 02/04/2006 | |
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Institutional investors plan to invest more in hedge funds and private equity mandates, according to State Street's second hedge fund study. The mostly US-based institutional investors who participated in the study indicated that they have plans to hire new alternative investment managers in the coming year. Eighty-six percent of respondents said they plan to add new hedge fund managers to their current line-up, while 67 percent said their hiring plans included new private equity managers. That, says Gary Enos, executive vice president and head of State Street's alternative investment servicing business, is primarily due to the high satisfaction rate of the hedge fund industry. "Satisfied customers go a long way towards explaining the industry's proliferation. Our study reveals hedge funds are meeting institutional investors' expectations with an astounding 100 percent satisfaction rate in achieving portfolio diversification as well as high marks for lowering portfolio volatility and increasing absolute return." According to State Street's study, nearly half (48%) of respondents have 5 percent or more of their portfolios invested in hedge funds today. Of this group, 44% have 10 percent or more invested in hedge funds. This represents an increase over 2004, when only 35% of institutions said they had 10% or more invested in hedge funds. Another survey, this time by Mercer Investment Consulting, confirmed this trend in the UK, where 10% of large pension funds now invest in hedge funds. For the first time, State Street also surveyed respondents about the role of private equity in their portfolios. Ninety percent of respondents allocate to private equity. Nearly half (47%) allocated 5% or more to this strategy. Nineteen percent said they allocate 10 percent or more. Alpha and beta separation The results of State Street's study also illustrate institutional investors' growing focus on the separation of beta and alpha returns. Such a strategy makes it easier to attain highly specific investment objectives. About 60% of the respondents said that they are able to differentiate between a given manager's beta and alpha returns, that is, identifying which manager is really generating value. State Street says that institutions who declare they cannot differentiate are usually in such a situation due to a lack of convenient tools and resources. "As investors become more aware of the benefits of separating alpha and beta, asset managers who can provide a wide range of beta exposures and interchangeable alpha sources are uniquely positioned", said Jane Tisdale, managing director of hedge fund strategies for State Street Global Advisors, the investment management arm of State Street Corporation. "Access to customizable resources such as alpha porting techniques offer increased transparency in measuring and rewarding performance and allow the flexibility to increase portfolio diversification with a low tracking error." J.L. |
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