Asian institutions to boost alternatives exposure by half

Despite being badly burned by alternative investments during the recent crisis -- when it became very tough to exit illiquid positions -- investors are once again looking to boost their exposure to assets such as hedge funds, private equity and real estate.

Regionally, Asian (including Japanese) institutions look set to make the biggest increases in allocations in percentage terms, although admittedly from a lower base than other regions, according to a global survey* that Russell Investments will release today. Indeed, this seems to be a trend among investors in Asia generally, from high-net-worth individuals to sovereign wealth funds to other state agencies.

Asian investors expect to increase their allocation to alternatives from 11% to 17% by 2012, finds the US-based investment management and consulting firm. That compares to the overall figure for survey respondents of an increase in allocation from 14% to 19%.

With regard to hedge funds, Asians have traditionally held the highest allocations compared to other regions, and that will remain the case, according to the Russell survey. The current Asian allocation to hedge funds is 6%, and that is expected to rise to 6.2% by 2012. That compares to expected rises of 4.4% to 5.5% in Australia, 2.2% to 4.3% in Europe, and 3.9% to 5.8% in North America.

These figures are still well off pre-crisis highs, however. Previous surveys had average allocations to hedge funds in the 7-8% range in Europe and North America and as high as 9-10% in Asia.

Allocations to private equity declined in 2009 due to the strong rebound in publicly traded equities, but are expected to rebound by 2012. Survey respondents in Asia expect the share of private equity in their total portfolios, currently averaging 1.2%, to double to 2.5%.

North America is expected to remain the region with the biggest investor exposure to PE, with its current 4.3% allocation expected to increase to 6.8% by 2012, while Europeans forecast a rise from 2.4% to 3.7% and Australians see their allocation remaining at around 3.5%.

Turning to real estate, Asian investors expect to nearly double their exposure from 2.7% to 4.8%. Australia has a fairly high weight, 8.7%, and that is expected to remain flat. North America is predicted to also see a close-to-double rise from 4% to 7.4%, and Europe from 4.9% to 6.2%.

As with hedge-fund allocations, the expected real-estate exposures are off their pre-crisis highs -- apart from in Asia. Europe had a property allocation of 9.8% in 2005 and Australia an exposure of 11.5% in 2003. Asia expects to slightly exceed its previous high of 4.7% in 2007.

With regard to other alternative asset classes, on a global basis, respondents expect commodities to increase from a 5% share of alternatives exposure to a 7% share in 2012. Infrastructure is expected to increase from a 2% share to 6%. In Asia, commodities and infrastructure combined are expected to increase from an 11% share of alternative assets to a 13% share. 

The Russell survey also asked respondents about their approach to risk management, and investors in most regions say there will be an increased focus on this area as a result of the crisis.

Specifically, half the Asian respondents plan to provide a greater overall focus on risk management while 21% plan to increase the frequency/depth of risk reporting to investment committees and management. 

"Institutional investors responding to the Russell survey indicated that the events of the past two years have brought risk management and governance concerns into sharper focus," says Nicole Connolly, Melbourne-based director of alternative investments for Asia-Pacific. "They are doing more of what was working and also taking new steps to fill in the gaps."

Since 1992, Russell has surveyed large tax-exempt institutions (public and corporate pension funds, endowments and foundations generally with assets of $1 billion or more) in Asia, Australia, Europe and North America about their participation in and expectations for core alternative investing strategies.

The global results are based this year on responses from and interviews with 119 organisations worldwide. The full report presents data by investment category and includes analysis of use of investment strategies, investment types and expectations for new investments over the next two years.

* The Russell Investments 2010 Global Survey on Alternative Investing is the ninth the firm has conducted.