Investors boost alternative allocations

Pension funds and endowments have rapidly increased their allocation to alternative assets to offset losses recorded in the public equity markets, according to a new report.

( Pension and endowment funds ramped up their allocations to alternative investments last year as an antidote to the losses they incurred on their domestic equity investments, according to a new report.


Although allocations to alternative investments such as hedge funds and private equity account for only 7.5 per cent of total assets among pensions, endowments and foundations, the move to alternative assets has been rapid and dramatic, according to a report from industry researchers Greenwich Associates entitled “Asset Allocation: US Portfolios Adjust to Difficult Markets in 2002.” The firm interviewed more than 1,000 of the largest corporate pension funds, endowments and foundations in the US for the report and concluded that the survey’s participants greatly reduced their investments in domestic equities while shifting more of their assets into alternatives.


“Formerly an avenue only endowments and the very largest funds took in any great measure, 2002 was the year alternative investment became more commonplace,” wrote Greenwich senior market analyst Ryan Randolph in the report. “The question here is whether investors are now chasing last year’s returns.”


Nearly 60 per cent of endowments and foundations invest in hedge funds, up from 50 per cent last year, and 20 per cent of pensions also allocate to the asset class, up from 15 per cent last year. Though investments in private equity leveled off in 2002, nearly 40 per cent of all funds allocate to the asset class, with over 60 per cent of endowments and foundations using private equity.


Greenwich Associates researchers believe pensions are relaxing their risk tolerance in order to make room for hedge fund allocations. Still, endowments are traditionally more likely to invest in hedge funds. This is particularly true of university endowments, because they are required to meet more aggressive return goals than pensions, and also because many university trustees are high-net-worth investors who are well acquainted with the asset class.


“Endowments and foundations have been the biggest drivers in the rise of alternative asset classes, particularly with private equity and hedge funds, where they not only lead the charge but comprise most of the heard,” the researchers wrote. Allocations to hedge funds among survey participants increased from 0.6 per cent last year to one per cent this year, or about $50bn in assets. Allocations to private equity were stable at 3.1 per cent of all assets, or nearly $160bn in 2002.


Among the survey participants invested in hedge funds, allocations are up to seven per cent, with a boost from endowments, which allocated an average of 15 per cent to hedge funds. The average allocation to private equity among corporate and public pension funds is five per cent and over ten per cent at endowments and foundations.


Over 20 per cent of the survey’s participants said they expect to make significant asset allocations over the next year. The most common expected shifts are to increase hedge fund, private equity, real estate and active international allocations and to decrease fixed income and domestic common stock exposure.