Peter Schwicht, the head of European institutional business at J P Morgan Fleming says institutional investors need to be educated about the benefits of alternative investments. He says institutions’ perception of risk is a key challenge to overcome.
“An education process is clearly required to demonstrate that specific alternative investment strategies can actually help to reduce overall downside risk in a portfolio.
“Given that returns from mainstream investments are likely to remain subdued for some time, there is now an opportunity for fund managers to shape the attitudes of institutional investors across Europe in alternative asset classes.”
The remarks came as the firm releases a new report, the ‘J P Morgan Fleming European Alternative Investment Strategies Survey 2003’ (see report in Alternative Investments supplement with this issue).
The report polled 341 European institutional investors, with total assets of more than e1trn. It found that the overall level of investment in private equity and hedge funds is actually quite low. The average allocation to private equity for example is 3.3%. The allocation to hedge funds averages 2.5%. Meanwhile, the average allocation to real estate is somewhat higher, at 11%.
The survey respondents cited “perceived risk” as the main reason for not investing in hedge funds and private equity. A “lack of understanding” and “advice from consultants” were also mentioned. More than a third of those polled cited “lack of liquidity” as a reason for not holding private equity.
The survey also found that 66% of investors felt that private equity strategies had met or exceeded their expectations. And 79% were happy with their hedge fund strategy.
The institutions cited the potential for higher returns and the low correlation with other asset classes as reasons for getting into alternatives. Fifty-six percent with hedge fund exposure aim to raise their allocation, while 45% of private equity holders want to increase their investment in the asset class.
The survey – which was carried out between November 2002 and May 2003 - found that 70% of respondents were invested in real estate, while 48% were invested in private equity. Twenty-two percent were invested in hedge funds while 23% were in currency overlay.