EUROPE - Europe could prove lucrative territory for hedge fund and private equity managers over the next three years.
In a bid to bolster flagging returns, more European institutional investors are seeking out absolute strategies. And in a dramatic reversal of trends seen in the 1990s, many are also flying out of stocks and into the relative security of bonds.
According to a study by US consultants Greenwich Associates, the proportion of equities in continental institutional portfolios has fallen from 36% to 30% since the end of 1999, with North American stocks hardest hit. Bond allocations, on the other hand, have shot up from 51% to 57% of assets last year alone.
“European institutions are revealing a lack of confidence in the integrity of US accounting standards, and the US equities market more generally,” said Greenwich consultant Chris McNickle.
On private equity and hedge funds, while investors currently commit an average of less than 1% of assets to either class, nearly 50% of these institutions plan to increase their allocation to hedge funds, and 40% plan to increase their allocation to private equity by 2005.
A recent study by strategy consultants Oliver, Wyman & Company and investment bank UBS Warburg showed that European asset allocations to alternatives is expected to grow by 30% by 2006, or E676bn.
“Hedge funds and private equity offer the chance for disproportionately high returns, but present their own challenges and risks,” warned McNickle.
Other key findings included:
- While investors decrease the proportion of assets managed externally by an average 4%, they are increasing the numbers of external managers, from an average of 7.6 to 8.8. This means that more investment managers are managing less money, and many individual managers find themselves managing a lot less.- Despite volatile markets, only 55% of European investors rebalanced their portfolios during the past year, compared to 80% of large US pension funds. Some 77% of US funds use specific rebalancing policies as part of their guidelines, as opposed to only 58% of European schemes.
Greenwich Associates conducted interviews with 310 of the largest pension funds across Europe.
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