Pension schemes increase allocation to hedge funds

J.P. Morgan Asset Management has established that on average UK institutional investors are currently allocating 28% of their portfolios to alternative assets, an increase from 21% three years earlier. In its most recent survey of UK institutional investors the Group found that this trend is expected to continue with respondents to the survey indicating they expect their allocation to alternatives to rise to 31% over the next two to three years, at the expense of equities.

The popularity of hedge funds

A highlight of the findings showed that hedge funds account for the highest alternative weightings for UK pension scheme portfolios, with an average allocation of 8.2% of a total portfolio, a rise from 6.1% in 2007. Investors also confirmed they expect to increase this allocation to an average of 9.2% over the next two to three years.

Not only is the exposure to hedge funds likely to increase, so is the proportion of hedge fund investors. J.P. Morgan Asset Management found that the percentage of UK pension schemes with exposure to hedge funds has grown significantly, with 45% of investors surveyed currently investing or looking to invest in hedge funds, up from 23% in 2007. Interestingly, the survey found that more than a quarter of these hedge fund investors made their first hedge fund investment less than three years ago.

Accessing alternatives

Historically smaller and mid sized pensions schemes have experienced a number of hurdles when investing directly in alternatives, so when asked if they would consider a solution that offers a diversified alternatives investment strategy, 92% of institutional investors with £0.5bn to £1bn in assets said they would consider this solution. In total 63% of all respondents confirmed this would be a strategy they would consider.

Real estate's fall from grace or return to favour?

Respondents to the survey also confirmed that whilst real estate has the largest market penetration, with 56% of all respondents investing or planning to invest in real estate, this has fallen from 71% in 2007. The fall in allocations could be attributed to disappointment in returns, with nearly one third of investors saying returns have been below expectations over the last twelve months. However, investors were optimistic about the outlook for real estate and expect an improvement in real estate returns over the next two to three years.

Investors look east for returns

In general, the findings of the survey showed that investors are broadly positive about the outlook for all major alternative asset classes over the next twelve months. In the longer term hedge funds are deemed the most attractive along with private equity and real estate over two to three years. However, from a regional perspective UK pension schemes expect the strongest returns in alternative assets to come from emerging Asia. The region is particularly favoured by private equity investors, with 18% of respondents saying they plan to buy in this area over the next twelve months.

Speaking about the findings of the survey, Peter Ball, Head of UK Institutional business at J.P. Morgan Asset Management said, "The findings of this most recent survey confirm that alternatives are set to see further strong growth in pension schemes. Whilst this does not necessarily come as a surprise, it does demonstrate how different allocations to alternatives are now compared with three years ago. It is clear investors are becoming more comfortable investing in alternatives as their understanding of such asset classes grows and, given the turbulent market conditions over recent years, they appreciate the increased level of diversification offered by alternatives."

Peter Ball went on to say, "The particular highlights of the survey show that hedge funds are popular asset classes. We continue to believe that hedge funds can offer the right investment solutions but it is key that investors are at ease with what they are investing in, which appears to be the case from the survey results. We are also comforted by the fact that mid sized pensions schemes like the idea of investing in packaged solutions that will provide them exposure to diversified alternatives. To us this demonstrates their understanding of the benefits of alternatives but that they need a solution to help them."

Peter Ball concluded, "The positive outlook for emerging Asia shows that investors are increasingly confident in seeking opportunities further away from home, a view which I believe demonstrates the increasingly global investment view adopted by UK pension schemes."