BNY Mellon study highlights investor enthusiasm for alternatives and risk management

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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