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Institutions and financial advisers optimistic about alternative investments


Institutions and financial advisers continue to view alternative investments optimistically, despite their questionable performance, correlation and liquidity during last year’s global downturn, according to a survey by Morningstar and Barron’s.

The majority of participants to the survey said they plan to increase allocations to alternatives, but with greater scrutiny and due diligence given to those investments.

More than 60 per cent of institutions and advisers believe that alternatives will be as important or more important than traditional investments over the next five years.

The majority of institutions and advisers expect alternatives to account for more ten per cent of their portfolios over the next five years; a quarter of institutions expect alternatives to account for more than 25 per cent of their portfolios.

Hedge funds were the most popular alternative vehicles over the last five years, and institutions and advisers expect to continue to increase allocations to hedge funds over the next five years.

For both institutions and advisers, the top three reasons for investing in alternatives remain the same as in last year’s survey: portfolio diversification, absolute returns, and exposure to different investment techniques, like arbitrage or shorting.

Institutions and advisers are much more concerned, however, about lack of liquidity and transparency than they were last year.

Compared to the 2008 survey, fewer institutions and advisers view real estate investment trusts and commodities as alternative asset classes.

Both institutions and advisers tend to classify investments as “alternative” based on the investment’s strategy, i.e. absolute return, rather than the investment’s designation, i.e. mutual fund versus hedge fund.

“Perhaps most important for investment consultants, advisers, and money management firms to note is the survey once again found that overall both institutions and advisers want the benefits of alternative strategies with the positive characteristics of traditional investments—low correlation with liquidity, absolute returns with transparency, and redemptions without restrictions,” says Steve Deutsch, director of the pension, endowment, and foundation database at Morningstar.

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