Global switch to private equity
Pension funds worldwide are finding “the appeal of private equity hard to ignore”, according to research-based consultancy firm, Greenwich Associates. Investments in the asset class have increased considerably over the last 12 months, and the trend is expected to continue.
In continental Europe, 31% of pension funds are using private equity as part of their investment strategy, compared to only 13% in 2001. Of those surveyed in continental Europe, a further 9% plan to start using private equity. In the UK, 8% of pensions funds will start using hedge funds, and in Japan 10% will start doing so.
The surge in interest in alternative investments is attributed to the poor recent performance of traditional equities. “Alternative investments not only offer enhanced diversification, but also provide new sources of alpha to pension funds and endowments desperately seeking returns.”
“Hedge funds can be particularly appealing in down markets, because they can take short positions. Private equity has in many instances produced spectacular rewards,” says the report.
But the report warns that there are potential disadvantages. The higher risk and long ‘lock-up’ periods of alternative investment vehicles may not suit the risk tolerance or the time horizon of some pension plans.
Also, with the growing number of hedge funds it may become increasingly difficult to find and, in turn, exploit the inefficiencies in the market