Fixed income's dwindling return expectations and equities' volatility are causing institutional investors to lean more heavily than ever on alternative investments.
An analysis of hirings reported by Pensions & Investments reveals that 54% of money allocated in manager hirings by institutions since the first quarter of 2011 were for alternatives. Since the start of 2011, investors have made a total of $94.6 billion in alternative investment commitments, including real estate, compared with $79.6 billion to equities and fixed income.
This compares to $9.3 billion committed to alternative investments and $6.1 billion invested in real estate in 2003 by North American investors, according to the Eager, Davis & Holmes Tracker Hiring Analytics Database. In that same year, investors made $50.1 billion of investments in equities and $15.8 billion in fixed income. (This excludes balanced and global tactical asset allocation mandates.)
While the trend toward alternatives is old news, what's new is the quickening pace. The reason: Investors have no where else to go.
Alternative investment hirings skyrocketed to $20.5 billion so far this quarter, accounting for the bulk of the $27.32 billion money managers in all asset classes — including stocks and bonds — were given this quarter to date.
This is an increase of almost 67% from the $12.3 billion investors committed to alternatives in the third quarter of 2011 and more than 122% above the allocations in the first quarter of 2011.
The biggest slice of total commitments to alternatives so far this quarter went to private equity, which accounted for $8.5 billion in commitments, up from $5.5 billion in the third quarter of 2011. Real estate was second, with $3.9 billion, followed by real assets other than real estate, with $3.89 billion. Investors committed $3.5 billion to hedge funds.
Even though some alternative asset classes such as real estate got battered during the market downturn of 2007 and 2008, investors are reconfirming their belief in the return and diversification benefits of alternative investments. Institutional investors, especially public pension plans, are expected to continue to shift into alternatives and out of fixed income and equities.
These days, many public pension fund investors and some corporate ones are looking at alternative investments — such as infrastructure, market-neutral strategies and more conservative hedge funds — to replace fixed income, said Jay Kloepfer, executive vice president and director of capital markets and alternatives research at San Francisco-based consulting firm Callan Associates Inc. He expects alternatives allocations to continue to grow in public pension plans.