Portfolio allocations to Alternatives continue to rise as investors look to diversify and ride out volatility.
Russell Investings annual survey into alternative investing looks at institutional investors but the results reflect investment demand from individuals via institutions.
There are three core reasons why institutional investors will continue to pour money into alternatives, according to a new report on the sector.
These are diversification, protection against volatility and seeking non-correlated returns.
They are revealed in the annual Russell Investments Survey on Alternative Investing report which is based on interviews with 146 institutions totaling more than $1.1 trillion in assets across North America, Europe, Australia and Japan. The survey found respondents cited diversification and shelter from volatility as main reasons for investment into the sector, leading Russell to anticipate rising allocations during the next three years.
“The volatility experienced in the market today reinforces institutions desire to invest in alternatives,” said Nicole Connolly, director, alternative investments, Asia-Pacific region, Russell Investments. While diversification was the main reason for investing into alternatives by 90% of survey respondents, 64% said the main reason was to protect against volatility and 64% said an important reason was to get exposure to low correlation strategies.
“The questions institutions are now asking is not whether to use alternatives but what the best way is to use alternatives to achieve their own objectives,” added Connolly. Locally, 85% of Asia Pacific investors (ex-Japan) surveyed said alternatives are meeting their expectations for the role they play in portfolios, compared to just 70% globally.
Institutions participating in the survey currently have an average of 22% allocation to alternatives. The majority of respondents indicated that allocations would remain static or increase over the next one to three years across all alternatives categories. “Alternatives can play a unique role in helping organisations achieve their desired investment outcomes, and in today’s dynamic alternative investment marketplace, institutional investors are using alternatives in multiple ways,” said Connolly.
“Since 1992, the Russell Global Survey on Alternative Investing has provided an important view into the changing nature of institutional perspectives regarding alternative investments,” says Julia Cormier, director, alternative investments. “In an environment characterized by low returns, a high level of global economic uncertainty and financial market volatility, alternatives are a critical component of a diversified, multi-asset portfolio. In expectation of continued volatility and market shocks, institutions are trying to shepherd their portfolios by structuring them to prudently manage risk, even as they also seek to achieve returns in a variety of potential market environments
The Survey also found that investors face a myriad of challenges in assessing the range of alternatives across the expanding spectrum of opportunities, so education is an important component for integrating alternatives into multi-asset portfolios.