CHICAGO (HedgeWorld.com)–Large institutional investors worldwide in greater numbers are considering hedge funds and are increasing their stakes in the emerging asset class, according to a newly released survey on alternative investments from Goldman Sachs and Russell Investment Group.
The survey, which was last conducted in 2001, shows how the acceptance of alternative investments and hedge funds in particular has matured in just a couple of years. Among the 325 institutions with at least US$3 billion in assets interviewed, the commitment to hedge funds grew substantially in North America, Europe, Japan and Australia.
According to officials, clients are looking for alpha-generating strategies and are diversifying into hedge fund, particularly in regions such as the United States where hedge funds provide more diversification from equities than private equity strategies do.
Nowhere has the switch been so significant than among pension funds. In North America, the median strategic allocation to hedge funds for corporate pension plans is now at 3% and projected to grow to 5% by 2005. For public pension plans the median strategic hedge fund allocation in 2005 is expected to be 2.9%, which is up from the 1% allocation registered in 2001.
If a pension fund has even a 1% outperformance, it can reduce the pension plan’s contribution rate by 15%, said Nigel O’Sullivan, managing director in Goldman Sachs International’s pension and insurance strategy group, London.
“Hedge funds are relatively small in terms of allocations but growing dramatically,” said Hal Strong, president and managing director of alternative investments at Tacoma, Wash.-based Russell Investment Group, co-leader along with Mr. O’Sullivan of the survey team.
The number of respondents that invest in hedge funds grew by 40% worldwide, according to the report. The most popular strategies are long/short equity and convertible arbitrage. Annualized returns for hedge funds are forecasted to range between 9% and 7% in 2005.
The report split its results by region, highlighting North America, Europe, Japan and Australia.