GLOBAL - A new survey is predicting a "very robust" rise in the use of hedge funds and private equity.
According to US-based Greenwich Associates global institutional investment in these asset classes is growing slowly but steadily.
“Research reveals a strikingly large number of institutional investors jumping on the alternative equities bandwagon,” said Greenwich.
The paper - ‘Alternative Investment Becomes New Choice’ -shows 31% of funds in continental Europe using private equity this year - up from just 13% in 2001 - and a further 9% with plans to start. In the UK, 8% of pension funds will start using hedge funds, and in Japan 10% will start doing so.
“We actually saw a higher percentage of funds invest in private equity in 2002 than said they were going to do so the year before, which means they have found the appeal of private equity hard to ignore,” said Greenwich Associates consultant William Wechsler.
In the US, pension fund investment in private equity alone totalled US$174bn in 2001. Greenwich expects an even greater uptake for 2002.
Among the most obvious factors pushing pension funds towards alternatives is the “abysmal” recent performance of traditional equities, the subsequent hunt for higher returns, as well as diversification purposes.
“Hedge funds can be particularly appealing in down markets, because they can take short positions. Private equity has in many instances produced spectacular rewards,” said Greenwich.
But the survey also warned investors of the potential risks of alternative investments.
- The higher risk and long “lock-up” periods of some alternative investment vehicles may not suit the risk tolerance or the time horizon of some pension schemes.
- A low number of IPOs (initial public offerings) and lack of venture capital opportunities.
- Some of the most successful hedge funds owe their success to taking advantage of market inefficiencies, but the recent influx of these funds may cause many of these inefficiencies to disappear.
In April and May of 2002, Greenwich Associates conducted interviews with 1372 pension funds across Australia, Canada, Japan and the UK and Europe.
Interviews were also conducted in 2001 with 1,445 of the largest corporate pension funds, public pension funds, and endowments in the US.
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