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

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

  • J.P. Morgan Asset Management

    MARKET PULSE

    ALTERNATIVE ASSET SURVEY 2010

    Uncovering the latest trends in alternative investments

    September 2010

  • 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 investment Allocation to alternatives Returns from alternatives Opportunities and challenges Resources dedicated to alternatives

    Part Two: Analysis by asset class Hedge Funds 1. Incidence of investment 2. Investment preferences 3. Reasons for investing 4. Risks and barriers to investment Private Equity 1. Incidence of investment 2. Investment preferences 3. Reasons for investing 4. Risks and barriers to investment

    Real Estate 1. Incidence of investment 2. Investment preferences 3. Reasons for investing 4. Risks and barriers to investment Infrastructure 1. Incidence of investment 2. Investment preferences

    Acknowledgements

    Page 04

    Page 05

    Page 07

    Page 08 Page 11 Page 13 Page 15

    Page 17 Page 17 Page 18 Page 19

    Page 21 Page 21 Page 22 Page 23

    Page 26 Page 26 Page 28 Page 29

    Page 31 Page 31

    Page 32

  • 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 the results 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 at www.jpmorganassetmanagement.co.uk/Institutional

    04 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

  • 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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    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 05

  • 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