Assessing risk profiles and due diligence practices and deciding when and how to rebalance portfolios are among the tasks institutional money managers are expected to address in the wake of the financial crisis of 2008, according to a new Greenwich Associates study.
"Don't just do something, stand there," is the name of the game for the first quarter of 2009, according to Dev Clifford, Greenwich managing director.
Institutional investors saw their asset values plummet by 31% in 2008, but so far many are continuing to move forward with a commitment to international assets and alternative investments like hedge funds and private equity, Mr. Clifford said in an interview.
Twenty-eight percent of institutional investors plan to continue to reduce their allocation to U.S. equities, according to the study, with 30% increasing private equity allocations, 25% increasing hedge funds and 20% equity real estate. Roughly 3% to 4% said they plan to decrease allocations to those three asset classes.
Mr. Clifford said asset-liability studies are likely to increase this year as the dust begins to settle.
This could be a short-term boon for consultants, but also could result in their undoing, Mr. Clifford said.
"(Managers) might face pressure because of the advice they got, and if they feel that the advice broke down, it might call into question the relationship with the consulting firm," he said. "(Consultants) have to have a pretty compelling argument for the continuing validity of those models or value of those models."
He said this could lead to an increase in search activity for managers and consultants by the middle of the second quarter.
Diversification strategies failed to protect many portfolios in the recent financial storm, but the study says managers might be hard-pressed to find a better model.
The U.S. stock market was down 34% to 38% in 2008, depending on the index, compared to an average loss of 18% for hedge funds for the 12 months ended October 2008.