Investors Boosting Exposure to Alternatives, Demand for Talent to Accelerate
Investors around the world are planning to significantly increase portfolio allocations to alternative investments. New research conducted by Russell Investments shows that institutional investors predict a significant surge in private equity returns over the next two years along with consistent returns for hedge funds and real estate.
In order to cash in on those gains, pension funds, endowments and foundations say they will dedicate a larger share of their total investment portfolios to alternatives.
“Describing the use of private equity, hedge funds and real estate as “alternative” is increasingly a misnomer in today’s sophisticated investment environment,” said John Bailie, Managing Director of Alternative Investments at Russell.
This growing trend is likely to increase demand for talent. Executive search firm, A.E. Feldman, says hedge fund jobs, private equity jobs and real estate jobs are likely to open up as investors boost their exposure to alternative investments. Candidates who have a comprehensive understanding of the risks and benefits of the various asset classes and investment strategies will be hot commodities.
Hedge Funds:
Investors everywhere (except for Australia) predict that their strategic allocations to hedge funds will increase by 2009, according to the eighth global report on alternative investing just released by Russell Investments. The survey, based on responses from 326 organizations worldwide, found that hedge fund allocations in North America are expected to jump 20% from 7.5% to 8.9% - the biggest increase anywhere.
“Worldwide, hedge funds have matured as an investment tool for diversifying portfolios and reducing risk,” says Victor Leverett, Director, Hedge Funds, Russell Investments.
Meanwhile, European respondents expect allocations to hedge funds to rise from 7.4% to 8.4% and Japanese respondents foresee an increase from 9.3% to 9.9%. Australians intend to hold hedge fund allocations steady at 4.1%.
Investors are bullish on hedge fund returns for the next two years. Institutional investors in the U.S., Europe and Australia all expect hedge funds to return about 9%. Ironically, in Japan where hedge fund use is most widespread (increasing to 71% in 2007 from 59% in 2005) hedge funds are expected to return only about 4.6% through 2009.
Private Equity:
U.S. private equity firms passed the $270 billion fund-raising mark for this year last month, according to Private Equity Analyst. That already beats the $258.2 billion record set in 2006.
Looking ahead, global return expectations are robust for private equity (ranging between 8% to 13%), according to the Russell survey. Every geographic area has forecast allocation increases through 2009, though optimism for this asset class is strongest in North America and Europe.
“Institutional investors still have high expectations for private equity and are forecasting, with the exception of Japanese respondents’ expectations for 2007 and 2008, double digit returns, for the next two years derived predominately from venture capital and secondary opportunities,” says Jay Pierrepont, managing partner, Pantheon Ventures-Russell Investments.
Leveraged buyouts remain overwhelmingly the most popular private equity strategy, especially in North America. Private Equity Analyst reports that leveraged buyout firms have drawn in $213 billion as of November, or 77%, of the total capital raised. According to Russell, LBOs accounted for 41% of private equity assets in Australia and 63% in Japan, up from 26% and 47%, respectively.
Real Estate:
The use of real estate as an investment strategy climbed worldwide over the past two years, according to Russell. Leading the way is Japan where utilization rose from only one in five respondents in 2005 to nearly 40% this year.
Moving forward, strategic allocations to real estate are predicted to increase in all regions. In North America, institutional investors anticipate an increase from 6.7% in 2007 to 7.3% in 2009.
“Real estate continues to play an integral role in institutional portfolios,” said Karl Smith, Director, Real Estate, Russell Investments. “Respondents around the world plan to increase allocations through 2009, with many respondents expressing interest in globally diversified real estate investments with access through private real estate funds and more liquid publicly traded real estate securities (REITs).”
