September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE...

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J.P. Morgan Asset Management MARKET PULSE ALTERNATIVE ASSET SURVEY 2010 Uncovering the latest trends in alternative investments September 2010

Transcript of September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE...

Page 1: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

J.P. MorganAsset Management

MARKET PULSE

ALTERNATIVE ASSET SURVEY 2010

Uncovering the latest trends in alternative investments

September 2010

Page 2: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:
Page 3: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:
Page 4: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

J.P. Morgan Asset Management M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 03

Contents

Foreword

Executive summary

About the survey

Part One: Key trends in alternative investmentAllocation to alternatives Returns from alternatives Opportunities and challenges Resources dedicated to alternatives

Part Two: Analysis by asset classHedge Funds1. Incidence of investment 2. Investment preferences 3. Reasons for investing 4. Risks and barriers to investment Private Equity1. Incidence of investment 2. Investment preferences 3. Reasons for investing 4. Risks and barriers to investment

Real Estate1. Incidence of investment 2. Investment preferences 3. Reasons for investing 4. Risks and barriers to investment Infrastructure1. Incidence of investment 2. Investment preferences

Acknowledgements

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Page 5: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Foreword

Three years have passed since we last looked at UK institutional attitudes to alternatives, as part of our pan-European Alternative Asset Survey 20071. This year’s survey is focused only on UK institutions but theresults are equally fascinating, suggesting that investors have kept the faith with alternatives despite the unprecedented market upheavals of the last few years.

Overall allocations to alternative investments have increased compared to the picture in the UK three years ago. Allocations to hedge funds in particular have risen well beyond the levels planned by UK investors in 2007. Institutional investors are also planning to increase their alternative allocations over the coming two-to-three years, suggesting that the alternative assets industry is set to see further strong growth.

Diverse range of respondents

I’m particularly pleased by the number of responses we received for this year’s survey and by the quality of the information provided. In total we received 125 completed surveys from a wide range of institutional investors. Most responses were from private and public sector pension plans, but we also received feedback from charities, family offices and foundations.

The assets under management of our respondents was also well spread, from many smaller pension schemes with less than GBP 500m under management, through to some larger institutions with portfolios in excess of GBP 10 billion. Please note that respondents were asked to answer with reference to their allocations as at 31 December 2009.

Comprehensive results

I’d like to thank everyone who took the time to participate in the survey – the diversity of respondents, both in terms of investor type and the size of their assets under management, means the survey represents one of the most comprehensive and detailed examinations of alternative investment trends in the UK.

The research allows UK institutional investors to compare and contrast their alternative investment strategies with their peers, helping to uncover current preferences for various alternative assets, with a focus on hedge funds, private equity, real estate and infrastructure.

The survey provides insights on current allocations to alternatives, and targeted allocations in two-to-three years. It also identifies the reasons for investing in alternatives, how institutions invest in alternatives, the challenges faced by investors looking to gain exposure to alternatives, and the barriers to investment.

Alternatives play a key role

I very much believe that alternatives, with their ability to help diversify risk and their potential to boost returns, have a key role to play in institutional investment portfolios. The results of this year’s survey suggest the majority of investors agree.

Peter Ball

Head of UK Institutional Business, J.P. Morgan Asset Management

1 The findings of the 2007 Pan-European Alternative Asset Survey are available atwww.jpmorganassetmanagement.co.uk/Institutional

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Page 6: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Executive Summary

J.P. Morgan Asset Management’s Market Pulse surveys are designed to capture the changing perspectives, shifting allocations and developing portfolio management trends of investors as they continue their passage out of the financial crisis, into recovery, and beyond.

In this survey, we set out to test the hypothesis that after an initial pause and reassessment of portfolio strategies in the depths of the crisis, institutional investors are resuming their steady march from the traditional to the alternative. The results of our research suggest this is indeed the case.

The overall portfolio allocation to alternative assets among UK institutional investors has grown over the last three years, despite the intense market volatility and liquidity issues that hit many alternative strategies during the financial crisis.

Having come through the crisis, investors are broadly satisfied with the returns they have received from their alternative allocations over the last year, and remain positive for all alternative asset classes over the next two-to-three years.

All of the data and results of this survey are as at 31 December 2009, unless otherwise indicated.

Portfolio exposure to alternatives has risen since 2007

UK institutional investors currently allocate 28% of their portfolios to alternative asset classes, on average. This compares to a 21% allocation three years ago (as noted by UK respondents to J.P. Morgan Asset Management’s 2007 Alternative Asset Survey). The rise in alternatives exposure has been at the expense of equities exposure, which has fallen from 50% in 2007 to 42% today.

Alternatives exposure is set to continue to grow

The trend from equities to alternatives is set to continue, with the allocation to alternatives set to rise to 31% over the next two-to-three years, while equities exposure is forecast to fall to 40%.

Hedge funds have the highest allocations and are growing rapidly

Hedge funds account for the biggest alternatives weighting in institutional portfolios, with investors allocating 8.2% of their assets to the asset class on average. Average allocations to hedge funds across all investors have risen from 6.1% in 2007 and are set to grow to 9.2% over the next two-to-three years.

The proportion of hedge fund investors has nearly doubled in three years

The percentage of UK institutions with exposure to hedge funds has grown significantly. 45% of investors currently invest or plan to invest in hedge funds, up from just 23% in 2007. This strong growth is reflected by the large number of new investors into the asset class over the last few years. More than a quarter of hedge fund investors made their first hedge fund investment less than three years ago.

Real estate has the largest market penetration, but popularity has waned

In terms of penetration across the UK institutional market, real estate leads the way. 56% of all investors have a real estate investment or plan to invest in real estate, which is a higher proportion than for any other alternative asset class, although below the 71% of investors who invested in real estate in 2007.

Real estate allocations have fallen

In contrast to the other major alternative asset classes, portfolio allocations to real estate have fallen since 2007. Average real estate allocations, at 7.3%, are down from 8.5% in 2007 and well below the 10.7% allocation that investors expected to have three years ago, perhaps reflecting the particularly difficult recent conditions in global property markets. However, real estate allocations are set to rise again to 8.0% over the next two-to-three years, based on responses from all investors.

Investors are broadly satisfied with hedge fund returns

The generation of returns is the primary reason why UK institutions allocate to alternatives. Over the last 12 months returns from alternatives have mostly met investors’ expectations, with hedge fund performance producing the most satisfaction.

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Page 7: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Real estate returns are expected to pick up over the next 12 months

Some disappointment was expressed over returns from real estate, with nearly a third of real estate investors saying returns have been below expectations over the last 12 months. However, investors are optimistic about the prospects for an improvement in real estate returns over the next 12 months.

Most investors are sticking with their private equity investments

Although private equity investors have experienced volatile returns over the last few years, most UK institutions do appear to be staying the course with their private equity commitments. While this may be due in part to long lock-in periods for private equity, it is notable that only 14% of investors have reduced their private equity exposure and just 2% have changed managers.

Investors are optimistic for future returns

Investors have a broadly positive outlook for all major alternative asset classes over the next 12 months, led by real estate. Longer term, hedge funds are deemed the most attractive, although private equity and real estate are also seen as offering particularly good investment opportunities over the next two-to-three years.

Emerging Asia holds most potential for alternatives

Regionally, investors expect the strongest returns from alternative assets over the next few years to come from emerging Asia. The region is particularly favoured by private equity investors, with 18% of investors saying they plan to buy Asia/Pacific private equity over the next 12 months.

Internal resources are biggest barrier to investment

Although exposure to alternatives continues to grow, many investors still find it challenging to invest in alternative asset classes. The main barrier to entry is internal resources, with smaller and medium-sized institutions in particular simply not having the expertise to invest in alternatives with any degree of confidence. This is an important issue that consultants and asset managers should seek to address.

Use of external consultants is helping to fill the gap in expertise

Half of the investors use a general investment consultant to help them make decisions regarding their alternatives allocation or to help them choose suitable alternative investments and managers. The growing use of consultants may give more institutions the confidence to invest in alternatives, or boost their alternatives exposure, in the future.

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Page 8: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

About the survey

Client type

The survey’s success is based on the diversity of its respondents and the quality of the responses received. In June and July 2010 we emailed institutional investors from across the UK inviting them to participate in the survey.

Survey responses were provided online. 202 responses were received, with 125 investors completing the survey. The responses came from investors from across the UK institutional market. Respondents were asked to answer with reference to their allocations at 31 December 2009.

By client type private plans (occupational and corporate) accounted for 41% of responses. We also received a significant number of responses from public plans (16%), while several charity, foundation, family office, bank and insurance plans also completed the survey.

A large number of investors said they were categorised as ‘others’ (26%). These investors were primarily financial service companies, local governments and endowments.

Asset size

The responses were provided by institutional investors with a wide range of portfolio sizes. The largest number of responses (46%) came from smaller investors with less than GBP 500m in assets under management. These smaller investors tended to be family offices, insurance companies and charities as well as several smaller private pension schemes.

However, a large number of responses (44%) were received from investors responsible for portfolios in excess of GBP 1 billion, mainly from public sector pension plans and banks.

6% of responses came from investors with portfolios in excess of GBP 10 billion, with 2% saying they had more than GBP 50 billion under management.

Figure 2: Respondents by assets under management

J.P. Morgan Asset Management M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 07

Figure 1: Respondents by client type

Public pension plan, 16%

Occupational pension plan, 21%Life insurance, 2%

Non-life insurance/reinsurance,4%

Family o�ce, 4%

Foundation, 1%

Bank, 3%

Charity, 3%

Other (please specifiy), 26% Corporate pension plan,20%

Public pension plan Corporate pension plan Occupational pension plan Life insurance

Family o�ce Non-life insurance/reinsurance

Foundation Bank Charity Other(please specify)

Less than £0.5 billion, 46%

£0.5 – £1 billion, 10%

£1 – £5 billion, 31%

£5 – <£10 billion, 7%

£10 – <£20 billion, 3%

£20 – <£50 billion, 1% >£50 billion, 2%

Less than £0.5 billion £0.5 - £1 billion £1 – £5 billion £5 – <£10 billion

£10 – <£20 billion £20 – <£50 billion >£50 billion

Base: 125Q. Please indicate your type of institution.

Base: 125Q. Please indicate your investment portfolio’s AUM as of 31 December 2009.

Page 9: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Part One: Key trends in alternative investment

Allocation to alternatives

Overall asset allocation

UK institutional investors continue to have a portfolio bias to equities, with 42% of assets allocated to equities on average.

The average portfolio allocation to alternatives was 28% across all investors. The alternatives allocation included exposure to hedge funds, private equity, real estate, infrastructure, commodities and other real assets. Most investors had some allocation to alternatives, with only 6% saying they currently have no alternatives exposure.

The 28% allocation to alternatives was above fixed income (at 26%) and up from the 21% allocation that the 112 UK institutions who answered our 2007 survey said they had to alternatives as at 31 December 2006.

However, the 28% allocation to alternatives differs widely by client type. Whereas occupational and public plans have weightings of 20% and 21% respectively, respondents in the ‘other’ segment have a much higher exposure of 39% on average. The high weighting to alternatives among the ‘other’ plans possibly reflects the responses from several financial service companies and endowments within this segment.

Looking ahead, it seems that the allocation to alternatives is set to continue to increase, with investors on average expecting to have a 31% portfolio weighting to alternatives in two-to-three years (up from the current 28%), primarily at the expense of equities, where the allocation is expected to fall from 42% to 40%.

Larger plans, which currently have smaller allocations to alternatives, are targeting more significant increases than their smaller peers, with both those in the GBP 1 to GBP 5 billion range and those with more than GBP 5 billion under management intending to increase their exposure to 29% by 2013.

Just 5% of all the respondents said they plan to decrease their exposure to alternatives over the next few years, with 41% planning to increase. The remainder (54%) expect to maintain the same alternatives weighting.

Figure 2: Current and planned asset allocation, by respondent size

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Figure 1: Current and planned asset allocation, by client type

Equities Fixed Income Alternatives Cash

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28

26

42 40

3

31

25

4

29 21

22

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24

22

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41

3 2 2

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Total Corporate Public

Target TargetEnd

Year End

Occupational

TargetYear End

Other

TargetYear End End

Equities Fixed Income Alternatives Cash

42 40 41 41 39 37 50 48

26 25 22 22 32 31 21 22

28 31 31 33 24 29 26 29

4 3 5 4 4 3 3 1

0

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Year Year Target

Total Less than £1 billion £1 – £5 billion > £5 billion

Target TargetEnd

Year End End

Year End

Target

The allocation by UK institutions to equities has dropped from 50% in the 2007 survey to 42% in 2010. While some of this decline may be attributable to market fluctuations, it may also be accounted for by the rise in allocation to alternatives, suggesting that investors have perhaps sought refuge in alternative assets during the intense stock market volatility of the last three years.

By respondent size, perhaps surprisingly the largest allocation to alternatives came from investors with under GBP 1 billion under management, who on average have 31% invested in alternatives.

Base: 85Q. Please indicate your asset allocation as of 31 December 2009 and your ideal asset allocation in 2-3 years time.

Base: 85Q. Please indicate your asset allocation as of 31 December 2009 and your ideal asset allocation in 2-3 years time.

Page 10: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Base: 85Q. Please indicate your asset allocation as of 31 December 2009 and your ideal asset allocation in 2-3 years time.

Allocations within alternative asset classes

The biggest alternatives allocation is to hedge funds, with an average 8.2% total portfolio exposure among UK institutional investors. This is up from the 6.1% average allocation to hedge funds seen in 2007. Despite headlines about hedge fund blow-ups, which may have been expected to be a deterrent to some investors, hedge fund allocations are generally ahead of the estimated 6.9% future allocation to hedge funds targeted by investors three years ago.

Private equity exposure currently stands at 5.8%, up from 3.0% in 2007. Unlike the other major alternative asset classes, exposure to private equity is only expected to grow very modestly over the next few years, to 5.9%.

Real estate is the only alternative asset class to have seen a fall in average allocations over the last three years. Average portfolio exposure to real estate now stands at 7.3%, below the 8.5% average weighting given to real estate in 2007. Current exposure is also well below where UK investors expected their real estate allocation to be three years ago, when expectations were for a 10.7% portfolio weighting. The drop in real estate exposure perhaps reflects the fairly volatile recent returns seen from the asset class.

Infrastructure is the least popular major alternative asset class, with just a 1.4% allocation on average. This is below the average portfolio allocation in 2007 of 1.9% and is perhaps surprising given that infrastructure allocations were expected to rise to 3.6% three years ago. However, allocations are expected to rise to 1.8% over the next few years.

By respondent size, investors with under GBP 1 billion in assets allocate the largest portion of their alternatives portfolio (10.7% of their overall portfolio) to hedge funds, followed by real estate (7.3%). Most allocations in this client size group are expected to remain relatively stable, perhaps reflecting the fact that this grouping already has the biggest allocation to alternatives and is the closest to its target allocation. The fastest growing, from a very small base, is infrastructure.

Investors with assets of between GBP 1 billion and GBP 5 billion have their largest allocation (7.6%) to real estate, and expect to increase this further over the next two-to-three years, to 8.5%. This group, too, intends to increase its infrastructure exposure the most, from 1.3% to 2.0%. Exposures to private equity and commodities are also expected to rise.

Investors with assets in excess of GBP 5 billion have their largest allocation to private equity (7.2%)2, but plan to cut this to 6.3% over the next two-to-three years. This group is the only one intending to reduce exposure to any class of alternatives. Allocations to hedge funds and real estate are expected to rise from 6% and 6.3% respectively now to 7.5% and 7.4% respectively in the coming years.

Figure 3: Current and planned allocation to alternatives – all respondents

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Figure 4: Current and planned allocation – by respondent size

J.P. Morgan Asset Management M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 09

8.2

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Hedge Funds Private Equity Real Estate Infrastructure

Year End Target

8.2 9.2 10.7 11.0 6.3 8.0 6.0 7.5

5.8 5.9 5.2 5.2 5.8

6.6 7.2 6.3

7.3 8.0 7.3 7.8 7.6

8.5 6.3 7.4

1.4 1.8 1.5 1.8

1.3 2.0

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Total Less than £1 billion £1 – £5 billion >£5 billionEnd

Year End

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Target Target Target Target

Hedge Funds Private Equity Real Estate Infrastructure Commodities Other Real Assets

2Due to small sample size, some results should be interpreted directionally only

Base: 85Q. Please indicate your asset allocation as of 31 December 2009 and your ideal asset allocation in 2-3 years time.

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13.7 13.3

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13.0

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Year End Target

Alternatives experience

UK institutions have been investing in real estate for longer than any of the other alternative asset classes. 70% of investors have made a real estate investment at some stage in the past, with 36% having invested in real estate for the first time more than ten years ago. Property has been used by investors as a portfolio diversifier for many years. The long-term nature of property investments reflects the illiquid nature of the asset class.

50% of investors have invested in hedge funds, but hedge fund investors are the least experienced with 26% of investors having first invested in hedge funds less than three years ago.

The high percentage of newcomers to hedge funds helps explain the sharp growth in hedge fund allocations seen over the three years since the last survey, as the asset class has become increasingly mainstream.

Few investors have experience with infrastructure. Two thirds of investors have never made an investment in the asset class, while 24% of investors first made an infrastructure investment less than seven years ago. This is unsurprising given that infrastructure is a relatively young asset class.

Point of interest: Allocations to alternatives among current investors only

We have also calculated the allocations to each alternative asset class only among those investors with a current exposure to each alternative asset class.

For hedge funds, current investors have a 13.7% weighting, and this exposure is expected to rise over the next two-to-three years, to 14.8%.

Private equity exposure currently stands at 13.3% among current investors in the asset class. Interestingly, current private equity investors expect to reduce their exposure slightly over the next two-to-three years to 13.0%. This is in contrast to the slight growth in private equity exposure suggested by the answers from all investors.

Real estate exposure among current investors is at 9.6% and is expected to rise to 10.6% in three years’ time.

For infrastructure, the average portfolio allocation is now 5.6%. Allocations among existing infrastructure investors are expected to remain the same over the next three years at 5.6%.

Figure 6: Number of years invested in alternatives

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10 M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 J.P. Morgan Asset Management

1-3 years 4-6 years 7-9 years More than 10 years Have never invested

26%

12%

14%

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16%

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10%

10%

13%

7%

12%

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11% 2%

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50%

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64%

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57%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Hedge Funds

Private Equity

Real Estate

Infrastructure

Commodities

Currency

Other Real Assets

Total Hedge Fund Private Equity Real Estate Infrastructure Base: 85 Base = 51 Base = 37 Base = 64 Base = 21 Q. Please indicate your asset allocation as of 31 December 2009 and your ideal asset allocation in 2-3 years time.

Base: 125Q. How many years ago did you first invest in each of the following alternative asset classes?

Figure 5: Current and planned allocation to alternatives – current investors

Page 12: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Returns from alternatives

Satisfaction with current returns

Broadly speaking investors have been satisfied with the returns they have received from all alternative asset classes over the last 12 months. In total, nearly 60% of investors with allocations to alternative assets said returns had met or exceeded their expectations.

Among the four major alternative asset classes (hedge funds, private equity, real estate and infrastructure) investors have been most happy with the performance from hedge funds over the last year. 61% of investors in hedge funds said that returns had met or exceeded expectations over the last 12 months.

Of the major alternative asset classes, real estate is the asset class that has most disappointed investors – 31% of investors deemed returns from real estate over the last 12 months to be below expectations. However, whereas 23% of real estate investors have had their expectations exceeded, just 6% of private equity investors have achieved better-than-expected returns.

J.P. Morgan Asset Management M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 11

Future return expectations

Over the next 12 months the majority of investors in nearly all alternative asset classes expect no change in the outlook. This perhaps reflects the current uncertainty over the direction of the economy, which is resulting in range-bound markets. However, far more investors expect an improving outlook than those who expect the outlook to worsen over the next year.

Investors are most positive about the prospects for real estate, with 39% expecting an improvement in the outlook for the asset class in the next year. This reflects optimism for a turnaround in property market performance following some disappointment over the returns received from real estate investments over the last year.

Investors are also optimistic for a pick up in private equity returns. Whereas only 6% of investors said returns from private equity over the last 12 months were ahead of expectations, 32% see an improving outlook over the next 12 months.

Investors are least positive about the outlook for currency investments, with just 17% expecting an improving outlook for the asset class.

Figure 2: Outlook for alternative assets over the next 12 months

Improving Worsening No change

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

29%

32%

39%

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72%

Hedge Funds

Private Equity

Real Estate

Infrastructure

Commodities

Currency

Other Real Assets

Figure 1: Satisfaction with returns from alternative asset classes over the last 12 months - current investors only

Above expectations Met expectations Below expectations Too short an investment period to judge

16%

23%

6%

23%

12%

18%

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16%

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38%

51%

32%

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40%

39%

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25%

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20%

28%

37%

17%

18%

19%

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10%

16%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Total

Hedge Funds

Private Equity

Real Estate

Infrastructure

Commodities

Currency

Other Real Assets

60%

Base: 160Q. For each of the alternative asset classes in which you are invested, have the returns you have experienced over the last 12 months been: above expectations; below expectations; met expectations; too short an investment period to judge? Base: 155

Q. What is your investment outlook for the following alternative asset classes over the next 12 months?

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Over a longer time horizon (three-to-five years) investors believe that hedge funds provide the greatest opportunity, with 30% ranking the asset class first among all other alternatives. 57% of investors ranked hedge funds in the top three alternative asset classes.

Investors are also relatively optimistic about the prospects for private equity and real estate over the next three-to-five years, while a significant number of investors believe the prospects for commodities and currency are also positive.

Notably, only 4% of investors believe infrastructure is the greatest opportunity over the intermediate term, despite the large number of infrastructure opportunities coming to market, particularly in emerging markets.

This may reflect the general uncertainty around infrastructure, which is a newer asset class and has so far seen only limited uptake, with only about a third of UK institutions currently investing or planning to invest.

In terms of regional opportunities, the clear preference among UK institutional investors is for emerging Asia, with 45% ranking the region as having the greatest opportunities for alternative investments over the next three-to-five years.

Although getting access to Asian alternative strategies can be more difficult and entail greater risk, the preference for Asia among UK investors matches the views of US institutional investors surveyed earlier in the year3, where 56% of US investors preferred Asia overother regions for the best future opportunities in alternatives.

3J.P. Morgan Asset Management Market Pulse – Alternative Assets, based on survey of 325 US institutions in March and April 2010

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Figure 3: Opportunities in alternatives over the intermediate term by asset class (three-to-five years)

Figure 4: Opportunities in alternatives over the intermediate term by region (three-to-five years)

1st 2nd 3rd

30%

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15%

4%

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0% 10% 20% 30% 40% 50% 60%

Hedge Funds

Private Equity

Real Estate

Infrastructure

Commodities

Other Real Assets

Senior Loan Fund

Maritime

Currency

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12%

10%

18%

9%

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32%

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Emerging Asia

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North America

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Middle East

Europe

Pacific

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1st 2nd 3rd 4th 5th 6th 7th

12 M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 J.P. Morgan Asset Management

Base: 80Q: Of the following alternatives, please rank in order the top 3 you feel offer the greatest investment opportunity over the next 3-5 years?

Base: 98Q: Please rank the following geographic regions in the order you feel offers the greatest opportunity for alternative investment over the next 3-5 years?

Page 14: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Opportunities and challenges

Objectives for investing in alternatives

The main objective for investing in alternatives is higher returns. 92% of investors said that return generation was one of their three primary reasons for allocating to alternatives.

Asset and liability management (58% of investors) was the next most important reason for using alternatives, which suggests pension plans are using the long-term investment characteristics of alternatives to help manage their long-term liabilities.

Volatility management was the third most popular objective among all of our investors when allocating to alternatives, with 45% saying it was one of their three main objectives. Clearly a large number of investors recognise the diversification benefits that alternative assets, with their low correlations to equities, can bring to an investment portfolio.

Surprisingly only 31% of all investors said that protection against inflation was one of their three main objectives. Inflation hedging was more popular with public pension plans, where 45% of responses put inflation protection in the top three objectives. This reflects the inflation-linked liabilities of many public plans.

However, with many institutional investors becoming increasingly concerned about the potential erosive long-term impact of inflation on their portfolios, perhaps more education is needed about the inflation-hedging properties of alternative assets such as real estate and infrastructure.

Figure 1: Primary reasons for allocating to alternatives

92%

58%

45%

31%

10% 2%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Returngeneration

Asset liabilitymanagement

Volatilitymanagement

Protection againstinflation

Preservingliquidity

Other(please specify)

Barriers to investing in alternatives

Despite the rising popularity of alternatives and the many strong arguments in favour of alternative investments, many investors still find accessing direct investments in alternatives problematic.

We asked investors what the biggest challenges were that they faced when managing their alternative allocations. This was an open-ended question and we received many different responses – some of which we’ve included in the box on the next page. However, we were also able to group the responses together into several key factors, which we’ve represented in the chart below.

Figure 2: Biggest challenges faced when managing allocations to alternative investments

As can be seen, investors most commonly cited internal challenges, notably a lack of time and resources, education and confidence. Many investors – particularly the smaller and medium-sized institutions – simply do not have the expertise or the resources to carry out onerous due diligence requirements for numerous, complex asset classes.

Perhaps linked to a lack of resources, many investors are also concerned about manager selection, in terms of risk/return, liability management and confidence in their alternatives manager. Better resources and education may help investors overcome these concerns and give them more confidence when selecting managers for their alternative allocations. Regulation and government interference is another fairly significant challenge, with some investors citing worries that government action may hit returns from alternatives.

18%

14% 12% 12%

11% 11%9%

3% 2% 2%

0%

5%

10%

15%

20%

Inte

rnal

Chall

enge

s – Ed

ucat

ion/c

onfid

ence

Inte

rnal

Chall

enge

s – Ti

me/

reso

urce

s

Portf

olio

Manag

men

t – A

sset

/liab

ility m

anag

emen

t

Portf

olio

Manag

men

t – R

isk/re

turn

Portf

olio

Manag

men

t – M

arke

t vol

atilit

y/unc

erta

inty

Portf

olio

Manag

men

t – Co

nfide

nce i

n m

anag

er

Gove

rnm

ent –

Reg

ulat

ion/In

fluen

ce

Portf

olio

Manag

emen

t – Tr

ansp

aren

cyPo

rtfol

io Man

agem

ent –

Liqu

idity

Impl

emen

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n

>>

J.P. Morgan Asset Management M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 13

Base: 125Q: What are the top 3 portfolio objectives driving your asset allocation decisions? Investors were asked to select up to three answers. Base: 86

Q: What is the biggest challenge you face when you think about managing your portfolio’s alternative asset allocation?

Page 15: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

We also looked at the reasons to invest and the barriers to investment across the three major alternative asset classes – hedge funds, private equity and real estate. These results are analysed in more detail later in this report in the ‘Analysis by asset class’ section. However, as can be seen in figure 3 below there is a great deal of agreement on the advantages of each asset class – namely the potential for return enhancement and portfolio diversification.

However, the disadvantages reflect some of the issues raised by the recent financial crisis, with volatility of returns, liquidity and transparency all featuring highly in our responses. Similarly, many of those investors who have not invested are put off by volatility and return expectations.

Liquidity, on the other hand, does not appear to be a major concern. The lack of concern about liquidity is not surprising, as the illiquidity of alternative investments can be a benefit for many pension investors. As a result of their very long-term investment horizons, many pension plans are able to take advantage of the illiquidity premium offered by alternative asset classes, accessing both higher potential returns and low correlations with traditional assets, and thereby improving portfolio diversification.

Few investors are worried about transparency, suggesting investors are largely unconcerned by past hedge fund scandals.

As this was an open question, we’ve included some of the responses in the box below.

What is the biggest challenge you face in managing your portfolio’s alternative asset allocation?

‘Understanding hedge fund manager strategies’ Corporate plan

‘Internal resources and time budget for decision making’ Corporate plan

‘Resources required to manage information and relationships’ Occupational plan

‘Lack of time’ Family office

‘Achieving a consistent acceptable level of return within acceptable levels of risk’ Public plan

>>

Greatest advantage (% of investors)

Greatest disadvantages (% of investors)

Greatest deterrents (% of investors)

Hedge fundsReturn expectations (73%) Diversification (62%)Volatility (54%)

Transparency (47%)Fees (41%)Volatility (37%)

Volatility (59%)Transparency (35%)Fees (29%)

Private equityReturn expectations (81%)Diversification (69%)Less constraints (34%)

Volatility (52%)Fees (44%)Liquidity (42%)

Volatility (48%)Return expectations (30%)Managing risk (29%)

Real estateReturn expectations (76%)Diversification (71%)Inflation protection (56%)

Liquidity (59%)Volatility (50%)Fees (37%)

Volatility (56%)Return expectations (33%)Managing risk (33%)

Figure 3: Advantages, disadvantages and deterrents to investing in hedge funds, private equity and real estate4

14 M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 J.P. Morgan Asset Management

4 Data based on top three advantages, disadvantages and concerns preventing investors from investing in hedge funds, private equity and real estate. Hedge funds – advantages/disadvantages base = 55; Concerns base = 67 Private equity – advantages/disadvantages base = 49; Concerns base = 71 Real estate – advantages/disadvantages base = 66; Concerns base = 52

Page 16: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Resources dedicated to alternatives

Use of consultants

Internal resources are cited most often as the biggest challenge to investment in alternatives. For those investors without internal expertise, external investment consultants can be extremely helpful when choosing how much of a portfolio to allocate to alternatives, and when selecting alternative strategies and managers.

It is encouraging to see, therefore, that half of investors use a general investment consultant to help them make decisions regarding their alternatives allocation or to help them choose suitable alternative investments and managers. 25% of investors use specialist consultants or advisers with dedicated expertise in alternatives.

Bigger investors (those with assets under management of more than GBP 5 billion) are much more likely to use a specialist consultant or adviser than smaller investors. 38% of investors with more than GBP 5 billion under management use a specialist consultant compared to just 21% of investors with less than GBP 500m under management.

Number of alternative managers

Investors tend to employ one or two managers across each alternative asset class. Investors are more likely to use more than one manager to manage their exposure to other real assets, but this is perhaps unsurprising given the variety of different strategies and investments covered by this category.

Figure 1: Use of external consultants

50%

25% 26%

8%

28%

4%

0%

10%

20%

30%

40%

50%

60%

A general investmentconsultant

A specific asset class specialist consultant

or adviser

We do not useexternal

resources

Other(please specify)

Implementedconsultant

Informationdatabases

Figure 2: Number of managers used for alternative investments

33%

24%

40%

23%

20%

26%

19%

6%

6% 3%

10%

4% 2% 3%

4% 2%

5% 2% 3%

7%

6%

5%

9%

4%

5%

7% 3% 3%

50%

59%

41%

68%

70%

64%

68%

Hedge Funds

Private Equity

Real Estate

Infrastructure

Commodities

Currency

Other Real Assets

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1-2 3-4 4-5 more than 5 N/A

J.P. Morgan Asset Management M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 15

Base: 123Q: For each of the alternative asset classes in which you are invested, please state how many managers you employ.

Base: 123Q: What resources does your organisation use to help make decisions regarding your allocation and investment in alternative assets? Investors were asked to tick all that apply.

Page 17: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Potential use of a diversified alternatives solution

Most investors (63%) said they would consider a solution that offers a diversified alternatives investment strategy, with some underlying liquidity, through one investment manager.

This perhaps reflects the concern that many investors have over the difficulties of accessing alternatives. As seen in the question about barriers to investing in alternatives, many investors feel that they do not have the time, resources, education or confidence to effectively manage alternative allocations, resulting in the appeal of a single diversified strategy we see reflected below.

Small-to-medium sized investors appear to be most interested, with 92% of investors in the GBP 500m – GBP 1 billion assets under management category saying that they would consider such a solution.

One explanation could be that smaller pension plans with relatively small amounts of capital to dedicate to alternatives may struggle to construct diversified portfolios using direct alternative investments. The minimum investment for a hedge fund, for example, is typically around USD 10m, while for asset classes such as infrastructure it is often much higher.

Smaller and medium-sized institutions may also find it particularly difficult to carry out due diligence for numerous, complex asset classes as reflected in the biggest challenges to the investment question.

Figure 3: Use of a diversified pooled solution

Yes

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

51%

92%

68%

75%

Less than £0.5 billion

£0.5 - £1 billion

£1 - £5 billion

More than £5 billion

16 M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 J.P. Morgan Asset Management

Base: 123Q: Would you consider a diversified alternatives investment strategy with some underlying liquidity through one investment manager?

Page 18: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Part Two: Analysis by asset class

Hedge funds

1. Incidence of investment

45% of UK institutions currently invest or plan to invest in hedge funds. This percentage is considerably higher than the results from the 2007 pan-European survey, where just 23% of UK investors said they invested or planned to invest in hedge funds. The result suggests that broadly the same proportion of UK investors use hedge funds as in the US, where a similar survey earlier in 2010 suggested that 54% of US institutional investors are invested, or plan to invest, in hedge funds .

Although hedge funds have achieved considerable growth in popularity among UK institutions over the last three years, more than half of investors still have no allocation and have no plans to invest in the asset class. However, there is a marked variation by size. Just 33% of the smallest investors by assets under management invest or plan to invest in hedge funds, compared to around 55% of respondents of all other sizes. This perhaps reflects the difficulty of constructing a diversified hedge fund portfolio for smaller pension plans, given the high investment minima and the need for extensive due diligence.

2. Investment preferences

The preferred way to invest in hedge funds is through a multi-strategy fund of funds strategy. These funds are used by 64% of investors who invest in hedge funds or plan to invest in hedge funds. They provide diversified access to the asset class, across a variety of different managers and strategies, making them perhaps the easiest and most cost-effective way to invest in hedge funds.

Far fewer investors use single strategy funds or funds operated by a single manager. Very large and sophisticated investors may be able to select a range of individual managers and the assets to allocate across a number of single strategy funds. But the clear preference is for the all-in-one multi-strategy fund of funds option.

Figure 1: Investments and planned investments in hedge funds

Figure 2: Accessing hedge fund strategies

0% 10% 20% 30% 40% 50% 60%

33%

54%

54%

56%

Less than £0.5 billion

£0.5 - £1 billion

£1 - £5 billion

>£5 billion

45%

55%

YesYes No

Currently invest Plan to invest No plan to invest

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

64%

38%

44%

38%

5%

9%

13%

9%

31%

53%

44%

53%

Fund of funds,multi strategy

Fund of fundssingle strategy

Single manager,multi strategy

Single manager,single strategy

J.P. Morgan Asset Management M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 17

Base: 123Q: Do you currently invest or plan to invest in hedge funds?

Base: 55Q: Please indicate how your portfolio currently accesses or plans to access hedge funds.

Page 19: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Base: 55Q: When considering investments in hedge funds, rank in order the top 3 advantages.

3. Reasons for investing

Investors mainly use hedge funds to boost potential returns, with 73% of investors ranking return expectations as one of the top three advantages of hedge funds, and 40% putting them in first place.

Portfolio diversification is the second biggest advantage of hedge fund investments overall, with 62% of investors ranking portfolio diversification as one of the top three advantages of hedge funds. Many hedge fund strategies are designed to boost portfolio diversification by maintaining a low correlation of returns to equities. Therefore, adding hedge funds to a portfolio that is dominated by equities (as most UK institutional portfolios are) may be seen as helping to reduce risk and smooth long-term portfolio performance.

>>

Figure 3: Advantages of hedge fund investments

As would be expected, very few investors use hedge funds to boost liquidity, with many hedge fund strategies requiring long-term lock-up periods. Hedge funds also are not used for their transparency or because of their attractive fee levels.

It also seems hedge funds are being widely used to boost returns rather than to reduce portfolio risk. Only 27% of those with exposure to a diversified growth product managed against a cash plus benchmark would also consider measuring their hedge fund allocation against a cash plus benchmark.

18 M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 J.P. Morgan Asset Management

40%

18%

4%

22%

11%

2% 2%

2% 2% 2%

18%

25%

22%

18%

7%

15%

11%

13%

22%

4% 2% 2%

4% 2%

5% 2% 2%

15%

9%

0% 1 0% 2 0% 3 0% 40% 5 0% 60% 7 0% 80%

1st 2nd 3rd

Return expectationsVolatility of returns

Less constrained portfolio management

Portfolio diversificationLiquidity

TransparencyFees

Use of leverageInflation protection

Internal resources required

Access to top-performing managersLegal and regulatory constraints

Board approval

Headline risk / reputation risk

Other (please specify)

Page 20: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Base: 55Q: When considering investments in hedge funds, rank in order the top 3 disadvantages.

4. Risks and barriers to investment

■ Current hedge fund investors

When asked to indicate the disadvantages of hedge funds, the level of fees charged by investment managers was cited as the biggest disadvantage by current investors. High fees can make it expensive for smaller investors in particular to gain access to a diversified hedge fund portfolio, although the increased trend for multi-strategy hedge fund products may help to alleviate this concern.

The second most commonly cited disadvantage is the volatility of returns, which may reflect higher-than-expected return volatility from some hedge fund strategies during the market dislocation of the last few years. In general though, many hedge fund strategies are intended to help reduce portfolio volatility.

>>

Figure 4: Disadvantages of hedge fund investments

1st 2nd 3rd

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

5% 9%

7% 15% 16%

5% 7%

11%

29%

16%

4%

4% 5%

11% 2%

2%

5%

5% 13%

13%

11% Volatility of returns

Fees

LiquidityUse of leverage

Headline risk/reputation riskTransparency

Return expectationsLegal and regulatory constraints

Portfolio diversificationBoard approval

Inflation protectionLess constrained portfolio managementAccess to top-performing managers

Internal resources required

27%

15% 9%

9%

7% 5% 5%

4%

4%

4% 4% 4% 4%

Transparency is also a concern. Only 5% of investors believe transparency is the biggest disadvantage, but 29% believe it is the second biggest disadvantage with hedge fund investing. Clearly hedge fund investors would like to see more transparency from investment managers, particularly in light of past high profile hedge fund scandals.

J.P. Morgan Asset Management M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 19

Page 21: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Another major barrier to investing in hedge funds is transparency. Worries over transparency ranked as the second biggest barrier to investment after volatility of returns. Past scandals may be continuing to deter some investors from investing in hedge funds.

■ Non investors

Among those investors who do not use hedge funds, volatility of returns was by far the biggest barrier to investment. Again, the perception that hedge funds are perhaps inherently more risky investments may reflect recent volatile returns from some hedge fund strategies.

However, given the objective of most hedge funds is to produce absolute annual returns and reduce portfolio volatility, concerns over volatile returns may also reflect a broader lack of understanding of how hedge funds work.

>>

Figure 5: Reasons for not investing in hedge funds (non investors)

1st 2nd 3rd

0% 10% 20% 30% 40% 50% 60%

LiquidityTransparency

FeesUse of leverage

Inflation protectionInternal resources required

Access to top-performing managersLegal and regulatory constraints

Board approvalHeadline risk / reputation risk

Other (please specify)

18% 34%

6%

13% 7%

4%

3% 3%

1% 1%

3% 3% 3%

3% 3%

4%

16% 6%

9% 4%

10% 12%

4%

6% 4% 3%

3%

7%

10%

4% 1% 9%

6%

12% 10%

7%

10%

12% 4% 1%

12%

Return expectationsVolatility of returns

Less constrained portfolio managementPortfolio diversification

Managing risk across a portfolio of Hedge Funds

20 M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 J.P. Morgan Asset Management

Base: 67Q: Rank in order the top 3 concerns preventing you from investing in hedge funds.

Page 22: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Figure 1: Investments and planned investments in private equity

Figure 2: Use of private equity strategies

Private equity

1. Incidence of investment

41% of investors said that they either invest or plan to invest in private equity. This result is just slightly higher than the 2007 study, where 40% of UK institutions said that they invest in private equity or plan to invest in the asset class. But it suggests that private equity is used by fewer investors than in the US, where research earlier in 2010 suggested that 52% of US institutions invested in private equity, with another 7% planning to invest.

Perhaps unsurprisingly, the proportion of investors investing or planning to invest in private equity increases significantly by size of investor. Just 21% of investors with assets below GBP 0.5 billion invest or plan to invest, compared to 73% of those with assets in excess of GBP 5 billion. As for hedge funds, this perhaps reflects the relative difficulty of accessing alternatives for smaller respondents.

2. Investment preferences

Among those investors that currently invest in private equity, buyouts is the most popular strategy, used by 71% of investors. Venture capital is also very popular, with 67% of private equity investors having exposure to the strategy. Growth equity, meanwhile, appears to have the biggest growth potential, with 24% of private equity investors saying that they plan to make an investment in the strategy.

In terms of how investors access or plan to access private equity strategies, investors are broadly split between generalist/global fund of funds (71%), sector or geographically focused fund of funds (65%) and separate accounts (61%).

Of the 61% of investors who invest in or plan to invest in private equity through a separate account, direct investments are the most popular method. 90% of investors who use or plan to use separate accounts to access private equity said they use or plan to use direct investments.

>>

Currently invest Plan to invest No plan to invest

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

71%

59%

53%

67%

45%

24%

6%

24%

20%

16%

20%

20%

22%

16%

27%

16%

35%

55%

Buyouts

Growth equity

Turnarounds/distressed

Venture capital

Secondary

Other

59%

Less than £0.5 billion

£0.5 - £1 billion

£1 - £5 billion

>£5 billion

Yes

41%

Yes No

21%

46%

58%

73%

0% 10% 20% 30% 40% 50% 60% 70% 80%

J.P. Morgan Asset Management M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 21

Base: 121Q: Do you currently invest or plan to invest in private equity?

Base: 49Q: You indicated that you currently own or plan to invest in private equity. Please indicate whether these are, or will be: buyouts; growth equity; turnarounds/ distressed; venture capital; secondary; other.

Page 23: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

In terms of regional preferences, private equity investors are clearly biased towards European investments. 50% of investors currently invest in European private equity, reflecting a preference for the more familiar home market. North American investments are also popular with 28% of private equity investors. The overall preference for Europe and North America also reflects the more developed private equity markets in these regions.

Only 15% of private equity investors invest in the Asia/Pacific region. Earlier in the survey (see ‘Future return expectations’ within the ‘Returns from alternatives’ section) investors had clearly chosen Asia/Pacific as having the greatest potential for returns from alternatives over the next few years.

Figure 3: Accessing private equity strategies

Figure 4: Regional preference for private equity investments

3. Reasons for investing

Most investors use private equity to boost potential returns, with 63% of investors ranking return expectations as the number one advantage of private equity.

Investors also clearly see private equity as a way to enhance portfolio diversification, with 69% of investors ranking diversification in their top three advantages of private equity investing.

>>

Currently invest Plan to invest No plan to invest

0% 20% 40% 60% 80% 100%

59%

53%

53%

12%

12%

8%

29%

35%

39%

Generalist/global fund of funds

Sector or geographicallyfocused fund of funds

Separate account

71%

% Currently invest % Plan to invest

50

28

15

7

46

29

18

7

0

10

20

30

40

50

60

Europe North America Asia/Pacific Other

Figure 5: Advantages of private equity investments

1st 2nd 3rd

Return expectations

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Volatility of returnsLess constrained portfolio management

Portfolio diversificationLiquidity

TransparencyFees

Use of leverageInflation protection

Internal resources requiredAccess to top-performing managers

Legal and regulatory constraintsBoard approval

Headline risk / reputation riskOther (please specify)

63% 6% 6%

16%

16% 16% 16%

31%

4%

6%

4% 2% 2% 2%

2%

2% 2%

2%

2%

2% 4%

6% 12%

22%

4% 4% 6%

14%

22%

However, this preference for Asia/Pacific is reflected to some extent in the rising number of investors who say they plan to invest in Asia/Pacific private equity over the next 12 months. Whereas 15% of investors currently invest in the region, 18% of investors say they plan to invest in Asia/Pacific private equity in the next year.

22 M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 J.P. Morgan Asset Management

Base: 49Q: Please indicate how your portfolio currently accesses or plans to access private equity.

Base: 37Q: Please indicate the percentage of your private equity portfolio you currently invest or plan to invest over the next 12 months, in the following geographic areas.

Base: 49Q: When considering investments in private equity, rank in order the top 3 advantages.

Page 24: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

4. Risks and barriers to investment

■ Current private equity investors

Among current investors in private equity, the biggest disadvantages of private equity investing are volatility of returns, fees, liquidity and transparency.

Private equity, by its nature, requires a very long-term investment horizon. Capital must be locked up for long periods and it can take many years before investments can be divested and profits realised. Therefore, it’s not surprising that liquidity can be an issue for many investors – 16% ranked liquidity as the number one disadvantage of private equity.

Investors are also unhappy about the lack of transparency of their private equity investments. 14% said transparency was the biggest disadvantage of private equity investing, perhaps reflecting the often guarded nature of private equity management.

The high level of fees charged by private equity managers is a further significant concern. Although only 8% of investors saw fees as the biggest disadvantage, 44% of investors overall ranked fees as one of the top three disadvantages of private equity investments. As a result, fees are ranked as the second biggest disadvantage of private equity overall.

Volatility of returns was ranked as the top disadvantage by the most investors (24%) and was the biggest disadvantage overall (52% of investors selected volatility of returns as one of the top three disadvantages of private equity investments).

The increased concern over volatility clearly reflects the difficulties experienced by several private equity funds over the last few years. A number of private equity funds prior to the 2008 credit crisis were highly leveraged and investor confidence was shaken when economic conditions deteriorated and deals began to fall apart. As a result, many investors may have experienced a higher volatility of returns from their private equity investments than perhaps they expected.

Despite this recent volatility, most UK institutional investors do appear to be staying the course with their private equity commitments. When asked whether the events of the last two years had changed their attitude or influenced their actions with regards to their private equity allocations, 69% of private equity investors said that they had stayed the course in terms of managers and investments.

14% of investors had decreased their private equity allocations, but an equal number of investors had taken the opportunity to increase their exposure to the asset class. Just 2% of investors had changed their private equity investment managers.

>>

Figure 6: Disadvantages of private equity investments

1st 2nd 3rd

Return expectations

0% 10% 20% 30% 40% 50% 60%

Volatility of returnsLess constrained portfolio management

Portfolio diversificationLiquidity

TransparencyFees

Use of leverageInflation protection

Internal resources requiredAccess to top-performing managers

Legal and regulatory constraintsBoard approval

Headline risk / reputation riskOther (please specify)

8% 24%

4% 16%

14% 8%

4% 6%

6%

4% 2% 2%

2%

2%

2%

2%

2%

22% 4%

4% 14%

10% 20%

4% 4%

8% 4%

6% 6%

12% 6%

16% 8%

10% 6%

14%

8%

J.P. Morgan Asset Management M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 23

Base: 49Q: When considering investments in private equity, rank in order the top 3 disadvantages.

Page 25: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Base: 120Q: Have you sold any private equity on the secondary market in the last 12 months?

74%

3% 3% 20%

14%

12%

51%

22%

Yes, I've purchased No, but I plan to purchase in the next 12 months

No, and I have no plans to purchase Not sure

Yes, I've sold No, but I plan to sell in the next 12 months

No, and I have no plans to sellNot sure

Figure 8: Use of the private equity secondary market

Some of the liquidity concerns with private equity that were expressed by many investors can be addressed to some extent by secondary private equity investments. Investors who need to raise liquidity can sell private equity commitments on the private equity secondary market.

Investors can also buy pre-existing investments in private equity on the secondary market, including all remaining unfunded commitments, giving them faster access to the asset class and potentially opening up attractive opportunities. Following the financial crisis, opportunities in the secondary market increased as a result of distressed sellers.

Nonetheless, many investors seem to be unfamiliar with the private equity secondary market. Just 6% of respondents have sold private equity on the secondary market in the last 12 months or plan to do so in the next 12. This low figure may be due to the fact that sellers are often unwilling to publicise the fact that they are selling.

More investors have used the private equity secondary market to buy investments – just over a quarter have either bought private equity on the secondary market in the last 12 months or are planning to buy on the secondary market in the next 12 months.

Nevertheless, the relatively low usage of the private equity secondary market by UK institutions suggests that few investors are taking advantage of the opportunities that secondary private equity provides.

>>

Figure 7: Attitudes to private equity investments

14%

14%

2%

69%

Yes, I have increased or plan to increase my Private Equity investments.

Yes, I have decreased or plan to decrease my Private Equity investments.

Yes, I have changed or plan to change Private Equity investment manager(s).

No, I have stayed the course in terms of managers and investments.

>>

24 M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 J.P. Morgan Asset Management

Base: 49Q: Have the events of the last 2 years changed your attitude or influenced your actions with regards to your private equity investment?

74%

3% 3% 20%

14%

12%

51%

22%

Yes, I've purchased No, but I plan to purchase in the next 12 months

No, and I have no plans to purchase Not sure

Yes, I've sold No, but I plan to sell in the next 12 months

No, and I have no plans to sellNot sure Base: 49

Q: Have you purchased any private equity on the secondary market in the last 12 months?

Page 26: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

■ Non investors

Among non investors, the biggest barriers to investing in private equity are return expectations and volatility of returns. The results suggest that many investors are yet to be convinced that private equity returns can benefit their portfolios and that some investors continue to be put off by worries that private equity investments are high risk and deliver volatile returns.

Lack of transparency and concerns over liquidity are also major hurdles, while legal and regulatory constraints are a further significant barrier to investment for a large number of investors.

>>

1st 2nd 3rd

23% 20%

10%

8% 8%

6%

8% 1%

1%

1%

1% 4% 4%

1% 1%

1%

18%

6% 11%

13% 4%

6%

7% 4%

4%

3%

4% 3% 3% 3%

4% 3%

15%

10% 11% 4%

6%

7%

6% 8%

18% 11%

6%

0% 10% 20% 30% 40% 50%

LiquidityTransparency

FeesUse of leverage

Inflation protectionInternal resources required

Access to top-performing managersLegal and regulatory constraints

Board approvalHeadline risk / reputation risk

Other (please specify)

Return expectationsVolatility of returns

Less constrained portfolio managementPortfolio diversification

Managing risk across a portfolio of Private Equitys

Figure 9: Reasons for not investing in private equity

Many investors are also worried that they don’t have the ability to manage risk across a private equity portfolio, suggesting some institutions do not have the confidence to diversify into private equity.

J.P. Morgan Asset Management M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 25

Base: 71Q: Rank in order the top 3 concerns preventing you from investing in private equity.

Page 27: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Figure 1: Investments and planned investments in real estate

Figure 2: Accessing real estate strategies

Real estate

1. Incidence of investment

Real estate is the most popular alternative asset class – over half of investors (56%) have invested or plan to invest in real estate. This is perhaps lower than expected, and down from the results of the 2007survey, when 71% of UK institutions said they were real estate investors. It should be noted that the 2007 survey was biased to larger respondents.

Investors with between GBP 1 billion and GBP 5 billion in assets under management are the most likely to have a real estate allocation, with 86% either investing or planning to invest.

2. Investment preferences

All types of real estate investing are popular, but the most common method of accessing real estate is through a closed-ended investment vehicle. Closed-ended funds can invest in a diverse range of property assets and take a long-term view without any interference from fund flows.

>>

60%

51%

52% 4%

48%

13%

12%

13%

27%

37%

43%

39%

0% 20% 40% 60% 80% 100%

Closed-end investment

Open-end investment

Direct investment

Currently invest Plan to invest No plan to invest

Real EstateInvestment Trusts

26 M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 J.P. Morgan Asset Management

Base: 120Q: Do you currently invest or plan to invest in real estate?

Base: 67Q: Please indicate how your portfolio currently accesses or plans to access real estate?

44%

Less than £0.5 billion

£0.5 - £1 billion

£1 - £5 billion

>£5 billion

Yes

56%

Yes No

36%

54%

86%

60%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Page 28: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Most of these allocations are made into core strategies, with 59% of investors currently following a core real estate strategy. Core plus, value added and opportunistic strategies are much less popular, with only 9% investing in a core plus strategy, 18% in value added and 13% taking an opportunistic approach.

These results are directionally similar to the North American study, with 52% following a core real estate strategy and only 11% investing in a core plus strategy, 19% value added and 18% taking an opportunistic approach.

>>

J.P. Morgan Asset Management M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 27

In terms of regional preferences, real estate investors are clearly biased towards European investments. 66% of investors currently invest in European real estate, reflecting a preference for the more familiar home market. There is a similar bias among North American institutional investors for North American real estate.

Globally diversified real estate investments are also popular, with nearly a quarter of investors currently investing in a global property strategy. Global property is also gaining in popularity with 27% of investors saying they plan to invest in real estate over the next 12 months.

Only 2% of real estate investors invest in the Asia/Pacific region. Earlier in the survey (see ‘Future return expectations’ within the ‘Returns from alternatives’ section) investors clearly chose Asia/Pacific as having the greatest potential for returns from alternatives over the next few years. However, with only 3% planning to invest in Asia/Pacific real estate over the next 12 months, UK institutions appear to prefer to keep their real estate allocations closer to home.

Figure 3: Regional preferences for real estate investments

% Currently invest % Plan to invest

23

66

5 2

4

27

61

5 3 4

0

10

20

30

40

50

60

70

Global Property Europe North America Asia/Pacific Other

Base: 55Q: Please indicate the percentage of your real estate portfolio you currently invest and plan to invest over the next 12 months, in the following geographic areas.

Page 29: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Figure 5: Expectations for a turnaround in real estate performance

20%

24%

22%

26%

8%

2010 2011 2012 2013 Other (please specify)

3. Reasons for investing

The main advantages of real estate investing are return expectations (ranked as the biggest advantage by 44% of investors) and portfolio diversification (ranked number one by 35% of investors).

As expected, inflation protection is also seen as a key reason to allocate assets to real estate. Although not often ranked as the number one advantage, inflation protection was ranked consistently as the second or third biggest advantage of real estate by over half of investors. Inflation protection can be provided by rental income from property, which would be expected to increase in line with inflation over time.

Returns from real estate have been disappointing over the last few years as the US subprime crisis and subsequent global downturn in property markets hit performance. Longer-term returns from the asset class remain strong, however, and investors do seem to recognise the diversification benefits that property returns can help provide to a portfolio.

Investors are also generally optimistic for a turnaround in real estate returns, with 44% expecting performance to pick up either this year or next. However, a third of investors do not believe that property performance will turn around until 2013 or beyond.

28 M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 J.P. Morgan Asset Management

Figure 4: Advantages of real estate investments

1st 2nd 3rd

Return expectations

0% 10% 20% 30% 40% 50% 60% 70% 80%

Volatility of returnsLess constrained portfolio management

Portfolio diversificationLiquidity

TransparencyFees

Use of leverageInflation protection

Internal resources requiredAccess to top-performing managers

Legal and regulatory constraintsBoard approval

Headline risk / reputation riskOther (please specify)

44% 8% 5%

2% 2%

3%

3%

3%

3%

2% 2%

2% 2% 2% 2% 2%

2% 2%

35%

18% 20%

18%

5% 26%

14%

8% 18%

5%

3%

5%

27%

6%

6%

Base: 66Q: When considering investments in real estate, rank in order the top 3 advantages.

Base: 120Q: When do you anticipate a turnaround in real estate investing?

Page 30: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

J.P. Morgan Asset Management M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 29

4. Risks and barriers to investment

■ Current real estate investors

As would be expected, liquidity is by far the biggest challenge associated with real estate investments. 48% of investors ranked liquidity as the biggest or second biggest disadvantage to real estate investing. This is broadly the same as the results from the 2007 survey, where liquidity was also identified as the biggest or second biggest challenge by 40% of UK institutional investors.

The recent volatility in global real estate markets has had an impact on investors’ perceptions over the last few years, with volatility of returns ranked as the biggest or second biggest disadvantage by 41% of investors. This is up sharply from 2007, when just 8% of UK institutions ranked volatility as the biggest or second biggest challenge to real estate investors.

Figure 6: Disadvantages of real estate investments

1st 2nd 3rd

12% 15%

42% 5%

8%

6%

26%

6% 6%

9% 21%

5% 6%

5% 6%

5%

9% 5%

11% 5%

14% 9%

6% 9%

15% 6%

2%

2%

2%

2% 2% 3%

2%

2%

3%

3%

9%

LiquidityTransparency

FeesUse of leverage

Inflation protectionInternal resources required

Access to top-performing managersLegal and regulatory constraints

Board approvalHeadline risk / reputation risk

Other (please specify)

Return expectations Volatility of returns

Less constrained portfolio management Portfolio diversification

0% 10% 20% 30% 40% 50% 60%

Fees are also still a significant concern for many UK institutions, with 23% of investors mentioning fees as one of their two biggest disadvantages to real estate investing. This is up slightly from 17% of UK investors mentioning fees as one of the two biggest challenges in 2007.

>>Base: 66Q: When considering investments in real estate, rank in order the top 3 disadvantages.

Page 31: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

■ Non investors

When we asked for the reasons why non investors do not invest in real estate, the results are even more marked. Non investors are clearly put off by the perceived volatility of real estate returns, while they also have fairly pessimistic return expectations.

Figure 7: Reasons for not investing in real estate

1st 2nd 3rd

0% 10% 20% 30% 40% 50% 60%

25% 27%

10% 13%

10%

21% 10%

6% 4%

4%

4% 4%

10%

6% 6% 4%

4%

2%

2%

2%

2%

2%

4% 4%

4%

4%

4% 4%

2% 19% 4%

8% 10%

6% 6%

6% 8%

8%

23%

LiquidityTransparency

FeesUse of leverage

Inflation protectionInternal resources required

Access to top-performing managersLegal and regulatory constraints

Board approvalHeadline risk / reputation risk

Other (please specify)

Return expectations Volatility of returns

Less constrained portfolio management Portfolio diversification

Managing risk across a portfolio of Real Estate

>>

30 M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 J.P. Morgan Asset Management

Interestingly legal and regulatory constraints also present a major hurdle for many investors when considering real estate, while a significant number of investors do not invest because of concerns about managing risk across a real estate portfolio.

Base: 52Q: Rank in order the top 3 concerns preventing you from investing in real estate.

Page 32: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

2. Investment preferences

65% of investors either invest or plan to invest in infrastructure through closed-ended funds – reflecting the benefits that closed-ended vehicles bring to investing in illiquid assets.

The next most popular method of accessing infrastructure is through open-ended funds, which is used by 60% of investors. Many investors (49%) also invest or plan to invest in listed infrastructure securities, while a smaller but still significant number of institutions make direct investments into infrastructure projects. 41% of investors use or plan to use direct investments.

Figure 1: Investments and planned investments in infrastructure

Figure 2: Accessing infrastructure strategies

Figure 3: Regional preferences for infrastructure investments

Infrastructure

1. Incidence of investment

Only about a third of UK institutions invest or plan to invest in infrastructure. However, investors with assets in excess of GBP 5 billion are much more likely to have an allocation to the asset class, with 67% either investing or intending to invest4.

As with the other alternative asset classes, when it comes to geographical allocations UK investors clearly prefer to invest in their home market. 55% of investors have a home bias to European infrastructure.

17% of investors have exposure to Asia/Pacific, which is much higher than for real estate and slightly above private equity. However, fewer investors (16%) plan to invest in Asia/Pacific infrastructure in the future – this is in contrast to earlier in the survey where investors chose Asia/Pacific as having the greatest potential for returns from alternative investments over the next few years.

20%

33%

33%

67%

Less than £0.5 billion

£0.5 - £1 billion

£1 - £5 billion

>£5 billion

Yes

0% 10% 20% 30% 40% 50% 60% 70%

32%

68%

Yes No

Currently invest Plan to invest No plan to invest

27%

32%

46%

38%

14%

16%

19%

22%

59%

51%

35%

41%

0%

Direct investments(i.e. not through funds)

Listed infrastructuresecurities

Closed-end funds

Open-end funds

20% 40% 60% 80% 100%

% Currently invest % Plan to invest

55

19 17

9

54

21 16

9

0

10

20

30

40

50

60

Europe North America Asia/Pacific Other

4 Due to the small sample size, some results should be interpreted directionally only.

J.P. Morgan Asset Management M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 31

Base: 117Q: Do you currently invest or plan to invest in infrastructure?

Base: 37Q: Please indicate how your portfolio currently accesses or plans to access infrastructure.

Base: 26Q: Please indicate the percentage of your infrastructure portfolio you currently invest and plan to invest over the next 12 months, in the following geographic areas.

Page 33: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Acknowledgements

J.P. Morgan Asset Management would like to thank all the institutional investors who took the time to respond to our survey. Without their participation, this report would not have been possible. The following participating institutions generously agreed to have their names listed in this report.

A Allied Irish Banks

Avery Weigh-Tronix

Awg Central Services Ltd

B BAA

Bedfordshire Pension Fund

BOC Pensions

Bracknell Forest Borough Council

C Capita Hartshead

Centrica

City of Edinburgh Council

Cookson Group Plc

Crownsway Insurance Brokers

E East Riding Pension Fund

Edwards Angell Palmer & Dodge

G Greater Gwent (Torfaen) Pension Fund

H Hampshire County Council

I Invesco Perpetual

Investment Solutions

J Jewell & Peterson

L Lancashire County Council Pension Fund

London Borough of Camden

Lutwyche Financial Services

Lyon Griffiths

M Mackays Stores Ltd

P Pinnacle Insurance Plc

Q Quinto Crane & Plant Ltd

R Ragbourne

Royal Borough of Windsor & Maidenhead

S Scout Association Pension Fund

Somerset County Council Pension Fund

Staffordshire County Council

Stagecoach Group Pension Scheme

State Street Global Advisors

Strathclyde Pension Fund

T The Pensions Trust

Transport for London Pension Fund

Trinity Mirror Plc

U University of Cambridge - Investment Office

X Xerox Pensions Ltd

32 M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 J.P. Morgan Asset Management

Page 34: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

Please contact us

Please contact us if you would like further information about J.P. Morgan Asset Management.

By telephone

Please call the J.P. Morgan Asset Management Institutional Relationship Management team on + 44 (0) 20 7742 6000.

By post

Please write to us at:

Institutional Investment ServicesJ.P. Morgan Asset ManagementFinsbury Dials20 Finsbury StreetLondon EC2Y 9AQUnited Kingdom

Online

Please visit us online at www.jpmorganassetmanagement.co.uk/institutional

J.P. Morgan Asset Management M A R K E T P U L SE : A LT ER N AT IV E A S SE T SU RV E Y 2 010 33

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Page 36: September 2010 - J.P. MorganSeptember 2010 J.P. Morgan Asset Management MARKET PULSE: ALTERNATIVE ASSET SURVEY 2010 03 Contents Foreword Executive summary About the survey Part One:

J.P. Morgan Asset Management

www.jpmorganassetmanagement.co.uk/institutional

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FOR PROFESSIONAL INVESTORS ONLY - NOT FOR PUBLIC DISTRIBUTION The opinions expressed in this document are those held by J.P. Morgan Asset Management at the date of publication and are subject to change. This material should not be considered by the recipient as a recommendation relating to the acquisition or disposal of investments. This material does not contain sufficient information to support an investment decision and investors should ensure that they obtain all available relevant information before making any investment. The information included in this document has been taken from sources considered as reliable; J.P. Morgan Asset Management cannot however guarantee its accuracy. The value of investments can go up as well as down and you may not get back the full amount invested. Past performance is not a guide to the future. Investing in alternative assets involves higher risks than traditional investments and investors should consult a professional adviser prior to investing. Alternative investments have higher fees than traditional investments, may not be tax efficient and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. The above communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited, and JPMorgan Asset Management Marketing Limited which are regulated by the Financial Services Authority; in other EU jurisdictions by JPMorgan Asset Management (Europe) S.à r.l. Issued in Switzerland by J.P.Morgan Suisse S.A., which is regulated by the Federal Banking Commission; and in the United States by J.P. Morgan Investment Management Inc., which is regulated by the Securities and Exchange Commission.
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