U.S. institutional investors' views on investing in alternatives has diverged from their investing brethren in Europe and Asia, said a new survey by Pyramis Global Advisors.
While the use of alternative investments is still rising rapidly in the rest of the world, use of liquid and illiquid alternatives appears to be slowing among U.S. institutions, partially due to those institutions already having higher alternatives allocations.
Among respondents planning to increase allocations to illiquid alternatives over the next one to two years, Asia leads the way with 79%, followed by Europe at 57% and the U.S. at 22%.
When asked which investment approaches are most likely to underperform over the long term, 31% of U.S. respondents cited hedge funds as least likely to meet expectations.
When asked specifically about the fees associated with alternative investments, only 19% of U.S. plans surveyed said hedge funds and private equity are worth the fees, as compared to 91% in Asia and 72% in Europe.
“When we asked U.S. investors if they thought these new alternative asset classes have grown too far, too fast, the response was overwhelmingly yes,” said Pam Holding, chief investment officer of Pyramis, in a phone interview. “That was clearly the opposite in Europe and Asia, where the majority of respondents said they'd be increasing their allocations to illiquid alternatives.”
Whether alternatives are taking up an increased portion of portfolios or not, confidence in achieving returns has risen among global institutional investors.
“I think stronger equity and fixed-income market performance is a key driver to this confidence,” Ms. Holding said. “I think the other pleasant surprise is that active strategies have done reasonably well.”
While investors in the U.S. and Canada are concerned over volatility issues, volatility expectations over the long term are quite low outside North America, as 91% of investors in Asia and 79% of investors in Europe believe that market volatility is decreasing and expect market bubbles and crashes to occur with less frequency.
Meanwhile, only 7% of U.S. institutions expect volatility to decrease, while 42% expect it to increase. This trend continues across North America, with only 10% of Canadian plans expecting a decrease in volatility, while 60% foresee an increase.
Of the U.S. pension funds that responded to the survey, 28% said funded status is their top concern.
On average, primary investment objectives among global institutions lean toward growth, but results vary considerably by geography. Asian institutions are overwhelmingly focused on growth, with 64% listing capital growth as the primary investment objective.
For plans in the U.S., funded status growth is the No. 1 investment objective, but levels differ among public plans (62%) and corporate plans (37%). Plans in Europe are primarily focused on preservation, while Canadian institutions are equally focused on preserving and improving their funded status.
The 2014 Pyramis Global Institutional Investor Survey had 811 respondents from 22 countries representing more than $9 trillion in assets. The survey was conducted in June and July.