Investing in alternatives to surge worldwide

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Institutional investor commitment to alternative investments is poised to reach record levels by 2007, according to the seventh global report on alternative investing released today by Russell Investment Group.

Wednesday, September 14th 2005, 9:02PM

Since 1992, Russell has surveyed the largest tax-exempt institutions (public and corporate pension funds, endowments and foundations generally with assets of US$1 billion or more) in Australia, Japan, Europe, Canada and the United States to gauge their participation in and expectations for alternative investing.

The results are published in a detailed report, 2005-2006 Russell Investment Group Survey on Alternative Investing, which presents data by region, investment category and type of institution.

Dr Edward Schuck, Managing Director of Russell Investment Group in New Zealand, said he expects New Zealand to follow global forecasts, which indicate that institutional investments in hedge funds, private equity and real estate will rise.

“Historically, institutional investors in New Zealand have been reluctant to move into alternatives because of a lack of suitable products and tax disadvantages.

However in the last year to 18 months we’ve seen a significant expansion in the range of products, and the Government has signaled potential changes to the taxation of overseas investments that will make alternatives relatively more attractive,” he said.

Topline findings from this year’s survey include:

• Average strategic allocations to hedge funds, private equity and real estate are expected to rise to new highs by 2007.
• The number of institutional investors using alternative investments climbed in 2005, particularly due to significant increases in Australia, Japan and Europe.
• Hedge funds have led much of the surge in alternatives, as a growing number of institutional investors use this investment and dedicate and ever-larger amount of money to this category. Average strategic allocations to hedge funds increased from 4.3% in 2003 to 6.2% in 2005.
• Return expectations are strongest for private equity, as the surveyed institutions across all regions are forecasting over 10% for this investment category. In contrast, institutional investors in North America and Europe have slightly lowered their forecasts for hedge fund returns even as they add more of these investments to their portfolios.

“This year’s survey paints a clear picture – alternative investing will grow at a rapid pace worldwide, hedge funds will continue to garner the greatest share of increased commitments, and smaller markets will increase their alternative investments significantly compared to more mature markets.

Real estate, private equity and hedge funds require a skill set and mindset different from the more traditional equity and fixed-income investing, and institutional investors are becoming increasingly comfortable with these demands,” said Dr Schuck.

“The Guardians of New Zealand Superannuation have recently highlighted the attractions of diversifying into alternative investments by announcing a longer term plan to invest up to one-third of the NZ Super Fund in unlisted assets.

"We expect to see other New Zealand institutional investors making allocations to alternatives in the months ahead,” he said.

Schuck said other details of interest from the global survey were:

1. Compared to 2003, hedge funds have captured a growing share of allocations to alternatives across most regions, particularly in Australia, where they now account for 13% of the overall allocation to alternatives, up from 1% in 2003.
2. Hedge funds of funds have convincingly become the investment vehicle of choice for hedge fund allocations.
3. Allocations to private equity are forecast to reach new highs in all markets in 2007, with markets that have traditionally had lower allocations to private equity (Europe and Japan) showing the largest expected increases.
4. Institutional Investors in all regions except Australia anticipate raising the percentage of their total assets invested in real estate in 2007.

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