GLOBAL – Hedge fund use by European institutions has increased dramatically in 2005. Their use by continental respondents to the Russell Investment Group’s seventh annual report on alternative investment the doubled to 48% from 24% in 2003.
By 2007, European institutions expect to dedicate 7.2% of portfolios to hedge funds, an increase from the 5.3% estimated for 2005. Nearly three-quarters of European hedge fund assets are invested in funds of funds, while 25.5% are invested in single funds and a nominal 0.1% is internally managed.
Private equity allocations are expected to reach new highs in all markets in 2007. European tax-exempt institutions currently allocate 4.5% of portfolios to the asset and are planning to increase this to 6.1% by 2007.
In Europe, where two-thirds of investors have real estate allocations, the proportion in the class is expected to rise to 10.5% in 2007 from 9.8% currently. The expected annual average return from real estate by European investors for 2005 to 2007 is 7.5%, below the 8.4% expected by North American and 8% by Australian investors.
The survey finds a significant shift from direct real estate investments, which now account for 63% of portfolios compared with 87% in 2003. “This decline is chiefly attributable to increased use of core and public real estate securities funds,” says Pascal Duval, managing director, institutional investment services, at Russell.
Overall, the report finds that the number of institutional investors using alternative investments climbed in 2005, particularly due to significant increases in Europe, Australia and Japan. Their commitment to alternatives is poised to reach record levels by 2007, says Russell.
A total of 327 large tax-exempt investors responded. In previous years, Russell was partnered by Goldman Sachs when conducting the survey.