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JP Morgan: UK institutional investors increase hedge fund allocations to 28%

Tuesday, September 28, 2010
Opalesque Industry Update – A survey conducted by J.P. Morgan Asset Management (JPMAM) has shown that since 2007, UK institutional investors have increased their allocations to hedge funds and other alternative investments from 21% to 28%.

In a statement, JPMAM said the study was undertaken between June and July 2010 and revealed a convincing trend that institutional investors would further raise their allocations to alternatives to 31% of their assets in the next two or three years, at the expense of equities, reported Easier Finance.

More significantly, the survey showed that hedge funds are the most popular alternative investment allocations amongst institutional investors in the UK, accounting to 8.2% of the total portfolio, an increase from 6.1% three years ago. Investors also revealed that they expect their hedge fund allocations to jump even further to an average of 9.2% over the next two or three years.

UK pension schemes investing in hedge funds have also grown over the past three years, according to JPMAM. From 23% of UK pension schemes investing in hedge funds in 2007, the number rose to 45% this year. Interestingly, the survey found that more than a quarter of these hedge fund investors made their first hedge fund investment less than three years ago.

Commenting on the findings of the survey, Peter Ball, Head of UK Institutional business at J.P. Morgan Asset Management said: "The findings of this most recent survey confirm that alternatives are set to see further strong growth in pension schemes. Whilst this does not necessarily come as a surprise, it does demonstrate how different allocations to alternatives are now compared with three years ago. It is clear investors are becoming more comfortable investing in alternatives as their understanding of such asset classes grows and, given the turbulent market conditions over recent years, they appreciate the increased level of diversification offered by alternatives."

Simon Chinnery, senior client adviser in JPMAM’s UK institutional client service unit added in an interview with that respondents of the survey maintain positive expectations for the returns from their alternative asset portfolios for the next year.

“We do this survey every three years, and this year we wanted to gauge the extent to which U.K.-based institutional investors were diversifying their portfolios after the problems of 2007. There weren’t any massive surprises in the responses. But after a pause in 2008, it’s clear that U.K. institutions are steadily moving more of their assets into alternative investments,” Chinnerry said.

At the same time, he confirmed that investors have expressed their intentions to raise allocations to hedge funds, private equity, commodities, infrastructure and real estate strategies while lowering their bets on equities.

JPMAM’s findings contrast a similar survey made by HFMWeek during the same period which showed that UK pension funds remain wary of investing into hedge funds, despite the increasing number of institutional investors betting to the space.

In a report published in July, HFMWeek said it surveyed 60 public and private UK pension funds and found that only 11% of the respondents not currently investing in hedge funds described their trustees' attitudes towards the sector as 'positive', with the majority classifying their stance as either 'negative' (37%) or as 'wary / uncertain' (25.9%).

Although as early as March this year, the UK Pension Protection Fund, the agency in charge of paying pensions when a firm closes shop, announced it had allocated 25% of its assets to alternatives like hedge fund-style products and private equity to boost diversification and returns.

Global trend
Globally, there is a growing trend amongst pension schemes to raise allocations to alternatives.

Earlier this month, a Quick Poll conducted by SEI, and investment management solutions provider, showed a significant increase in the percentage of pension portfolios investing in alternatives, when compared to the previous two years. In 2008, 51% of pension executives surveyed in an SEI Quick Poll said their pension portfolio was invested in alternatives. In 2009, that percentage increased to 53%. This year's poll saw an increase to 65% of the poll participants. Use among pensions with more than $300m in assets is significantly higher than those with less; 84% compared to 53%, respectively.

It was also found that many institutional investors are enlisting some of their trust back into hedge funds. In a new “Hedge Fund Investor Spotlight,” Preqin, a London-and New York-based research firm, explained that nearly 60% of respondents to its August survey believe that there has been a change in terms that have benefited investors.

Last week for example, Orin Kramer, financial consultant to the New Jersey State Investment Council advised the state’s pension fund to invest more money in alternative investments such as private equity and real estate to raise returns and protect against stock losses. And Japan’s second-largest drug-maker, Astellas, announced plans to invest in alternative including hedge funds, private equity and infrastructure to account for 10% of the pension plan.

- Precy Dumlao


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