Gaining Ground

Gaining Ground
Global alternative investing growing fast

By Joseph Morgart, Senior Vice President, Alternative Investments, Pyramis Global Advisors, a Fidelity Investments Company

Globally, the pension industry holds approximately $16 trillion in assets, with $9 trillion of that held outside the U.S. Assets within the industry continue their steady growth.1 Over the past several years, pension investors have become more and more comfortable–as well as more accepting–of global alternative investment strategies.

Pension investors are not the only ones embracing different types of strategies for global investing. Alternative investments2 have been an increasingly prominent feature in the global investment landscape, with $1.9 trillion3 in assets at the end of 2007, and an astonishing growth rate of 24%3 over the past three years. One of the most popular of these is hedge funds, which include equity market neutral, equity long/short, event-driven, relative value arbitrage, and macro. These funds aim to mitigate certain types of risk or exploit certain types of opportunities, with equity long/short being the largest and fastest growing. These strategies are not only being evaluated because of their risk/return potential, but also because of diversification benefits they can offer.

Within the general hedge fund category, we are seeing four trends: an increasing demand for global-focused strategies, an interest in strategies based on fundamentals, manager consolidation and a move by pension funds into medium- and low-volatility strategies.

Concerns still prevalent

Right now, Canadian investors only have about a 4% allocation4 to alternative investment strategies but are looking to increase that. However, when it comes to investing in these global alternatives, Canadian and U.S. investors alike still have some concerns, including transparency, effective risk management, higher fees and a lack of understanding about how they work.

How should investors meet these challenges? When building an alternative investment strategy, the foundation is based on education, understanding, evaluation and constant monitoring. Establishing a measurable set of goals for your entire alternatives allocation as well as the underlying strategies is imperative. Next, develop a consistent process for manager evaluation and selection. At a minimum, within this step include a careful review of a manager due diligence questionnaire, offering memorandum and monthly reports. On-site manager visits are a crucial to evaluating the investment, risk management, trading and operations. Finally, an on-going review of the manager, the fund and the operations needs to be formalized.

In U.S. and Canadian pension funds, there is a marked increase in the number of plans that are considering making changes that involve global alternative investing. The demand for these types of investments seems likely to grow, because they’re satisfying a need within institutional investor portfolios in terms of risk/return, diversification and correlation characteristics. The next step will be to address the lingering concerns about these types of strategies, so that investors can be even more comfortable when considering them as part of their plan.

Endnotes
1Source: Watson Wyatt, 2007 Global Pension Asset Study. Global pension market includes defined benefit plans and defined contribution plans.
2 Global alternative assets exclude private equity, venture capital and real estate.
3 Hedge Fund Research, Q4 2007, Greenwich and Associates
42007 Pyramis Canadian DB Plan Sponsor Survey.

> click here to download the presentation