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Institutional investors are continuing to turn to alternative assets despite concerns about market volatility, according to State Street research.

The report, By the Numbers: The Quest for Performance was produced by independent think-tank Center for Applied Research (CAR) in partnership with the Fletcher School of Law and Diplomacy at Tufts University, and found that the move to alternatives has been “significant” in the sector. 

Among OECD pension funds, alternatives rose from six per cent to 19 per cent of total assets under management from 2000 to 2012.

“The search for performance remains elusive,” CAR global head of research Suzanne Duncan said.

“As institutional investors’ creativity and patience continue to be tried, meeting performance challenges demands a disciplined core, innovative thinking and flexibility.”

The report also found that a globally diversified portfolio, which includes alternatives, enhanced performance net of fees by 70 per cent, with only marginally higher volatility, compared to a traditional portfolio of 60 per cent equities and 40 per cent fixed income.

However, CAR said the performance gap between the best and worst private equity managers has increased more than 38 per cent from pre-crisis levels to hit 18 per cent.

“Not all alternatives are created equally, and neither are the investors who turn to them in the hunt for alpha,” CAR global head Kelly McKenna said.

“Today’s successful institutional manager will balance a desire for return with an appreciation for the complexity of portfolio risk as well as investment and liquidity constraints, while respecting the rapid nature of market events that can implicate return objectives.”

 


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