Institutional investors will increase their allocations to liquid alternative ETFs from $47 billion to $114 billion in the next 12 months, according to a new study from Greenwich Associates.
“For more than 20 years, institutional investors have been adding alternative asset classes to their portfolios, Andrew McCollum, Greenwich Associates managing director and author of the report, said in a statement. “More recently, institutions have been adopting ETFs as a versatile, jack-of-all-trades portfolio tool.”
McCollum said the intersection of these trends could ultimately transform alternative investments in institutional portfolios.
Greenwich Associates conducted in-depth telephone interviews between April and June with 107 senior fund professionals at large U.S. institutions. Participants in the study, commissioned by IndexIQ, included public funds, corporate funds, endowments and foundations, and family offices, as well as representatives from outsourced chief investment officers and consultants.
According to the study, liquid alts currently represent about 4% of institutional assets, with average allocations ranging from a high of 6% of total assets among public pension funds to a low of 2% among corporate funds and OCIOs in the U.S.
These allocations represent $882 billion in institutional assets invested in liquid alts, including $564 billion from public funds.
A Novel Vehicle
Liquid alternative ETFs are a relatively novel vehicle for most institutional investors, the report said.
However, more and more institutions are taking advantage of liquid alt ETFs’ liquidity and relatively low costs in tasks ranging from manager transitions and tactical portfolio adjustments to taking on long-term investment exposures and replacing fund-of-fund investments.
Institutions that use liquid alt ETFs invest an average 3% of total assets to the funds, the study found.
Greenwich Associates noted, however, that over the decade it has been tracking institutions’ use of ETFs, it has documented a consistent pattern that has unfolded across institution type, geographic region and asset class, namely, that institutions start with small investments in ETFs, generally for a single tactical task, such as a manager transition.