Alternatives on the rise, but real estate funds down

A bi-annual study by Seattle-based asset manager, Russell Investments, suggests institutional investors continue to demand exposure to alternative assets. But when it comes to real estate only 38 percent say funds are the chosen vehicle.

Institutional investors continue to demand exposure to alternatives for diversification and ‘sheltering’ reasons, according to a study released today.

Seattle-based asset manager, Russell Investments, said in its Global Survey on Alternative Investing that respondents cited diversification and shelter from volatility as the main reasons for investment into alternative assets, which includes real estate. Further, the firm said it anticipated rising allocations to most alternative strategies in the next one to three years.

The position is different compared to two years ago when Russell last published the report. In 2010, it found institutional investors’ attitudes to alternatives were “in flux” as they were still adjusting to the repercussions of the global financial crisis across their entire portfolios.

Institutions that responded this time around, however, seemed clearer on strategy, with most having significant allocations to alternative investments – on average, 22 percent of total fund assets.

Diversification was cited as one of the top three reasons for using alternatives by 90 percent of respondents, while ‘volatility management’ and ‘low correlation to traditional investments’ was mentioned by 64 percent  and ‘return potential’ was noted by 45 percent.

Additionally, the majority of respondents indicated that allocations would remain static or increase over the next one to three years across all alternatives categories. Thirty-two percent of respondents expected to increase their investment in hedge funds and private real estate, 28 percent in private infrastructure, 25 percent in private equity, 20 percent in commodities, and 12 percent in public real estate and public infrastructure.

There was potentially some good news for those involved in private real estate as well as hedge funds as 32 percent indicated that they may make increased allocations to both the asset classes. At least 30 percent indicated they were below their target weights in hedge funds, private real estate and private equity, while traditional investments – cash, fixed income and equities – were more frequently over their target allocation. Cash, specifically, was over-target for 45 percent of respondents, which may indicate that they are being cautious about taking risk and waiting for the right time to reposition cash.

In further findings, REITs and unlisted private real estate funds continued to dominate as ‘implementation’ choices, with 51 percent of the respondents who hold real estate currently using those vehicles.

However, the sting in the tail was only 38 percent of those respondents said real estate funds would continue to be an implementation choice in the next one to three years. Allocations to direct property investments and customised separate accounts were expected to rise in the near future.