Institutional Investors Still Favor Alternative Investments, JPMorgan Survey Finds

A recent survey conducted by JPMorgan Asset Management that examined the investment strategies and practices of large U.S. institutional investors found that alternative investment strategies, including investments in hedge funds, private equity and real estate, are no longer "alternative" at all. In fact, there has been no overall pullback from them even during recent challenging market conditions.

The JPMorgan Asset Management Next Generation Alternative Investing Survey examined the investment practices of 191 of the largest U.S. institutional investors across corporate plans, public funds and endowments and foundations representing $1.26 trillion in assets. The survey was conducted by Greenwich Associates in the first quarter of 2008.

Growth expectations for alternative investments remain strong, despite current market disruptions, dislocations, and sub-prime contagion. Average allocations to alternatives exceed 18% and are expected to exceed 22% by 2010 -- an increase of over 20%. Hedge funds/absolute return strategies will account for approximately 40% of net inflows into alternatives through 2010. In private equity, growth will be strong, led by 62% of current investors planning to increase allocations, the highest percentage across all alternative asset classes. Real assets/real estate is expected to experience more modest growth.

Although all institutional investors share a common need for return enhancement and diversification, the growth dynamics of alternatives play out differently in each investor segment, due to unique issues and concerns.

Corporate plans: Given recent and anticipated regulatory and accounting changes, corporate plans are focused on controlling funded status volatility -- increasing fixed income allocations and significantly extending durations. These plans have the lowest average total alternative allocations (13%), anticipated to grow to 15% by 2010.

Public funds: With a focus on consistently earning required returns to meet their long-term benefit obligations, and not subject to the changing regulatory and accounting environment of corporate plans, public funds are currently more active in alternatives than their corporate counterparts. In fact, their participation rate with respect to absolute return/hedge funds has increased approximately four-fold (to 43% of plans invested) since our survey in 2004. These investors also show strong growth in private equity and green/sustainable investing.

Endowments and foundations: This group of investors is clearly leading the way in alternative investing with allocations accounting for over a third of portfolio assets by 2010.

For the vast majority of investors surveyed, alternative investments are currently meeting performance expectations. Investors' greatest concerns are falling returns/performance for alternatives, liquidity concerns, and overcrowding of the alternatives marketplace.

Fees are a concern to investors but over a third of investors believe that fees are fair as long as return expectations are met.

Commenting on the findings, John Hunt, CEO of Institutional Americas at JPMorgan Asset Management, said: "What our survey indicates is 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."