Alternative investment strategies are now established components of institutional portfolios and are no longer ‘alternative’, according to a recent survey commissioned by JPMorgan Asset Management.
The JPMorgan Asset Management Next Generation Alternative Investing Survey, which polled 191 of the largest US institutional investors in Q1 this year, found that growth expectations remain strong, despite market disruptions such as the sub-prime crisis.
Average allocations to alternatives currently exceed 18% and are expected to top 22% by 2010. This would represent a 20% increase in the value of institutions’ allocations to alternative investments. A pervasive need to enhance and diversify returns is driving growth, with a shift in allocations away from traditional assets toward alternatives, the survey found.
Growth in average allocations is expected across all major alternative asset classes, with absolute return/hedge funds and private equity growing the fastest. JPMorgan Asset Management estimates absolute return/hedge funds will account for about 40% of net inflows into alternatives through 2010.
The strong growth in private equity will be driven by the fact that 62% of current investors are planning to increase allocations – the highest percentage across all alternative asset classes. Real assets/real estate will experience more modest growth, the report said.
For the vast majority of investors surveyed, alternative investments are currently meeting performance expectations, but there are concerns. JPMorgan Asset Management said the greatest of these are falling returns/performance, liquidity concerns, and overcrowding of the alternatives marketplace. Fees are also a concern to investors, but over a third believe that charges are fair as long as return expectations are met.
“Our survey indicates that alternatives, used in the right way, are enabling investors to better tailor investment strategies to address their myriad of financial and investment concerns, be it controlling volatility, boosting returns, or hedging inflation,” said John Hunt, CEO of institutional Americas at JPMorgan Asset Management, in a statement.
He added, however, that although alternative assets have become an essential part of institutions’ portfolios, continuous innovation will be required to meet the needs and appetites of institutional investors, who will demand an increase in the availability and diversification of alternative offerings.