Pension funds and high net worth investors really like the idea of high-yielding, low volatility assets. Where they are looking for them is in infrastructure and real estate. But they seem less likely to give credit to the portfolio volatility dampening or alpha-generating effects of hedge funds and commodities.
So reports a survey conducted by the Canadian chapter of the Alternative Investment Managers Association. Pension consultants and investors were separately queried across five asset fields: hedge funds, commodities, real estate, private equity and infrastructure. Survey results were presented by AIMA Canada COO James Burron at the 2013 World Alternative Investment Summit Canada (WAISC) in Niagara Falls, Ontario in September.
The survey finds: “Consultants were generally positive on all 5 areas, with particular emphasis on Hedge Funds, Infrastructure and Real Estate while investors had more negative views in all 5 areas (except Infrastructure) than positive (Real Estate was the most favourably reviewed).”
Across the five fields, “Investor responses showed research, target weighting and investing in all 5 areas with a dearth of activity in Hedge Funds.”
A frequent reason was “headline risk” (which is somewhat ironic given that the new CEO of Ontario Teachers’ was its chief hedge fund specialist and lived through headline risk).
It’s also at odds with the consultants’ view, since they reported a large number of hedge fund searches by investors.
That said, investors find all alternative markets but hedge funds expensive; And with the favoured category, real estate, they find a lack of suitable investment vehicles. At the same time, they want further education in Hedge Funds 101 and in advanced topics such as risk parity.
To break out attitudes, the consultants like real estate private equity and infrastructure. Yet, when they rated their own knowledge, consultants said they knew most about hedge funds and not as much about private equity (or commodities).
The comment from the survey analysts is that: “Since hedge funds typically deal in public markets, many portfolio managers and CFA charterholders would have knowledge of the instruments traded and metrics used. Private Equity, Real Estate and Infrastructure are all private transactions focused on operational expertise that may not be as prevalent among respondents. Commodities may be public or private and involved derivatives (futures, forwards and options on futures) that may not be as well-known.”
Still, from the consultants’ vantage point, there is key interest among clients about real estate and hedge funds.
That’s one side of the balance sheet. The other side belongs to the investors. What they want is real estate and infrastructure.
As the analysts note: “Given where real estate has been and its generally low volatility (thanks to appraisal pricing) it is not surprising that it was a favourite (as long as investors … side-stepped huge losses in ex-Canada properties) while the other areas can have a more mixed history.”
That said, institutions are looking to invest in hedge funds and infrastructure, less so in real estate, which appears to be a bit frothy.
In any case, it’s useful to survey the alternative investment universe – almost 15 years after the tech wreck upended volatility expectations for common stocks.
As is appropriate with an AIMA survey, it does note fat-tailed responses. But no black swans appeared in the survey.