Institutions Set To Ramp Up Alternative Investments

Dec 4 2007 | 7:44am ET

Institutional investors around the world have boosted their exposure to alternative investments over the past two years, and are expected to continue to do so over the next two. Allocations to hedge funds are expected to rise everywhere except Australia, where they will be flat on 4.1%, according to a new survey from Russell Investments.

In North America, hedge fund allocations are expected to rise the most, from 7.5% this year to 8.9% in 2009, while in Europe respondents think they’ll increase from 7.4% to 8.4%. And institutions responding to the survey in both regions are the most bullish on hedge fund returns over the next two years, where, along with Australia, returns are expected to average 9%. By contrast, in Japan, where hedge fund allocations are the largest (already averaging 9.3%) and most widespread (the number of Japanese respondents with hedge fund investments rose from 59% in 2005 to 71% this year), return predictions are more pedestrian at 4.6%.

Generally, respondents are more positive about private equity investments, where returns are expected to average between 8% and 13% in the next two years. Again, North Americans and Europeans are more optimistic than their Pacific Rim counterparts.

While private equity allocations in North America slipped slightly over the past two years, over the next two, institutions are expected to increase their share of the pie across the board. Leveraged buyouts remain overwhelmingly the most popular private equity strategy, especially in North America, where 71% of p.e. commitments are to LBOs.

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