Survey reveals over half of European institutions are “convinced non-investors” in hedge funds

29 November 2007

On the heels of Deutsche Bank’s recent report “Alternative Investments In Perspective“, JP Morgan came out with a European perspective earlier this week called “Are Alternatives Mainstream?” (view full report).  The two reports are similar in that they both cover the various pillars of “alternative investments” such as real estate, private equity, infrastructure, commodities and, of course, hedge funds. 

JP Morgan’s headline number is 107 billion Euros.  As in, European institutions will add 107 billion Euros to their alternative portfolios in the next “2-4 years” according to the firm’s survey of nearly 300 institutional investors.  While that sounds impressive, only 17 billion of that will actually be in the form of hedge funds.  With around 1.9 trillion in assets managed by the survey respondents, this amounts to an increase of around 1%.  Not huge, but still considered a dramatic change for mega-pensions known for their glacier-like speed. 

How will these investors spend their next 107 billion?  Just the same way you and I would spend any old 107 billion.  You know, some real estate, a few hedge funds, private equity…perhaps some commodities.

In contrast to JP Morgan’s 2003 survey that revealed a large number of institutions were “undecided” on hedge funds, this edition shows that investors are now settling into two camps: those who invest in hedge funds already (42%) and “convinced non-investors” - those who have no plans to do so at all (51%).  This leaves only 7% with yet-unexecuted plans to invest and it begs important questions about the industry’s growth assumptions.   

The survey says that both investors and “convinced non-investors” perceive hedge funds as being the most risky of the alternative asset classes.  Yet when asked about risk and return expectations, respondents flip-flopped - saying they expected returns around 8% with the lowest volatility of any of the alternative asset classes (6.4%).   

The return forecast provided by respondents is a little lower than the returns recently experienced by them.  Yet a quarter of those who experienced returns of 7% or less over the past few years on their hedge fund investments now expect returns above that number.  Optimism abounds. 

Most institutions managed their alternatives portfolio using internal staff.  But apparently, UK-based institutions were far more comfortable outsourcing the nuts and bolts than were their colleagues on the continent.  In fact, it kind of looks like the British don’t want to dirty their hands with alternatives at all.  No wonder Watson Wyatt and other consultancies are doing so well in the UK (see related posting).

In a curious twist, JP Morgan finds that the largest and smallest investors are most likely to have hedge fund investments (53% each), while fewer (well under 40%) of those companies with between 1 billion and 10 billion Euros invested in hedge funds.  No explanation was provided in the report for this anomaly.

While a 1% growth over 2-4 years may not be Earth-shattering, buried on page 26 of the report is a far more important observation about the more fundamental role of alpha-centric investing:

“…the influence of hedge funds is set to be far wider than the actual allocation by institutional investors to the asset class would suggest as hedge fund techniques are being more widely used with “traditional” asset classes such as equity or fixed income.”

On the question of whether alternatives are mainstream, the report concludes that real estate certainly is, but that “the case for hedge funds and private equity is less clear…alternatives are not sweeping them off their feet.”

The irony is that a large majority of the “convinced non-investors” in hedge funds will likely end up investing in the same strategies once they are integrated into their existing investment mandates.  In many cases, those existing mandates may not even have to change since their traditional managers may simply elect to pursue these strategies using synthetic exposures. 

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One Response to “Survey reveals over half of European institutions are “convinced non-investors” in hedge funds”

1. James Says:
   November 30th, 2007 at 10:16 am

   Hi

   Two small observations

   In the UK pensions industry, it is more common for companies to use investment consultants than it is in almost any other country - partly to do with legislation and events (Myners in the early 00’s) Hence the disparity between the UK and other countries.

   Secondly, Investment consultants are not doing quite as well as you may think in the UK. A few reasons:

   Poor management (WW was a partnership, when this was removed a few people became very rich and most didn’t). All the other major ones have management issues.

   LDI/Banks. Many highly qualified staff have left consulting and joined investment banks, for pension solutions teams. Others have joined asset management LDI teams given the requirement for actuarials skills there. There has been huge staff turnover in the industry for some years now.