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Institutions keep faith with alternatives

20 November 2013

Improved performance outweighs return volatility concerns, according to new study

Read more: Alternatives investment

Institutional investors retain an appetite for alternative investments, according to a new study produced by State Street’s independent think tank the Center for Applied Research (CAR) in partnership with the Fletcher School of Law and Diplomacy at Tufts University.

Using empirical analysis, supplemented by manager interviews and survey reviews, the By the Numbers: The Quest for Performance study looked at the investment patterns of institutional investors across an extensive asset profile diversified by geography and a broad use of alternative assets and strategies.

Three mock portfolios were created – a US 60/40 portfolio consisting of the S&P 500 index and an index of 10-year US corporate bonds; a globally diversified portfolio consisting of a 60/40 mix, equally weighted among world, emerging and frontier equities and 20-year treasury and 10-year US corporate fixed income; and a 40-20-40 broadly diversified portfolio of equally weighted positions of the S&P and emerging indexes, 10-year US corporate bonds and proxies for hedge fund and private equity strategies.

Based on the performance of these portfolios over three distinct timeframes (2003-2008, 2008-2012 and 2003-2012), the study concluded that the move to alternatives can significantly enhance performance. A globally diversified portfolio including alternatives generated 70% enhanced performance net of fees with marginally higher volatility compared to a more traditional portfolio composed of 60% equities 40% fixed income.

The study also found that the differential between the best and worst performing private equity managers has increased from 13% pre-GFC to 18% now. Among Organization for Economic Co-operation and Development (OECD) pension funds, the move to alternatives has been significant, rising from 6% to 19% of total assets under management from 2000 through 2012

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