Institutions, financial advisers high on hedge funds, survey finds

Institutional investors and financial advisers are thinking positively about alternative investments, according to a survey conducted by Morningstar and Barron's, with the majority expecting alternative investments such as hedge funds to make up more than 10% of their portfolios over the next five years.

"One of the most interesting findings from our survey is that both institutions and advisers continue to view alternative investments optimistically, despite their questionable performance, correlation, and liquidity during last year's global downturn as well as the high-profile scandals that rocked the hedge fund industry," said Steve Deutsch, director of the pension, endowment, and foundation database at Morningstar, in a press release. "Again this year, the majority of participants indicate that they plan to increase allocations to alternatives, but with greater scrutiny and due diligence given to those investments."

Among the survey findings:

More than 60% 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 10% of their portfolios over the next five years; a quarter of institutions expect alternatives to account for more than 25% 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," Deutsch added.

Morningstar and Barron's conducted the Web-based survey in late September through early October 2009; 89 institutions and 300 financial advisers participated. Additional results, including charts, can be viewed online here.