BNY Mellon study highlights investor enthusiasm for alternatives and risk management

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Investors
18 Feb, 2014

Institutional investors are planning to increase their allocations to alternatives over the next five years in order to improve diversification and mitigate downside risk, according to a white paper by BNY Mellon.

The study, which was conducted in collaboration with Nobel Prize winning economist Dr Harry Markowitz, highlighted 75% of corporate pension plans and 54% of public pensions were currently invested in hedge funds, and predicted this would increase to 91% and 68% respectively over the next five years. It added 85% of endowments are also allocating to hedge funds, and said this would jump to 100% in five years time.

Sixty-nine per-cent of respondents said they used alternatives for diversification benefits although just 6% said they used these investment vehicles to compensate for return shortfalls. Pension plans, many of whom are suffering from ever growing liabilities are being forced to invest in alternatives. A survey by Barclays Prime Services in January found 60% of new investor capital in hedge funds in 2014 would be derived from institutional investors, of which 45% would come from public and private pension plans.

Risk management will also play a greater role in investor decisions, according to 80% of respondents. Seventy-three per-cent of those surveyed said they expected to spend more time on investment risk issues while 68% said they would devote greater attention to operational risk issues. Despite this, just 25% of investors had a dedicated risk officer.  The main drivers behind this increased awareness of risk management include the financial crisis, greater investor knowledge on issues surrounding risk, regulation and greater media attention.

 

 

 

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