IN PRINT ARCHIVE CIR Summer 2008
By Joseph Morgart, Senior Vice President, Alternative Investments, Pyramis Global Advisors, a Fidelity Investments Company
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.
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.