Alternative Investments

Since the early 1990s, investor interest in "alternative" asset classes has grown significantly. Such alternative assets cover a wide range of investment opportunities. The major categories include real estate, private equity, hedge funds, and more recently, infrastructure. An investment is considered "alternative" if it has relatively limited investment history, is relatively uncommon in investment portfolios, is relatively illiquid, has different performance characteristics than traditional assets, is rarely traded in public markets and requires specialized skills on the part of the investment manager.

By contrast, traditional investments have historically been comprised of stocks, bonds and cash equivalents, are traded in public markets, can be benchmarked and are managed by strategies that are not based on short selling, excess leverage, or the use of derivatives.

Interest in alternative assets has gained increasing momentum over the past five years in particular. The tanking of the equity markets in 2000 combined with the low yield bond environment has led investors to shift a significant portion of their assets out of traditional investments, public equity and bonds, into alternatives.

According to the latest survey¹ of fund managers, published in the 2007 Global Investment Review, about $200 billion flowed into alternative assets in 2005. Pension funds accounted for the largest share of these in-flows. In addition, a recent survey² on alternative investing suggests that in 2006 alternatives accounted for between 10% to 20% share of institutional investments around the world.

Moving forward, survey results conclude that alternatives will constitute an increasing share of new allocations by institutional investors, including foundations and endowments, corporate and public pension funds and high net worth individuals.

The heightened volatility in the equity markets and record low bond yields has led to a critical transformation in the criteria of the investment community.

Institutional investors now demand alternative and diversified sources of return that are less volatile, yet higher on a risk adjusted basis. Investors are also targeting assets that are uncorrelated with traditional equity and bond investments in order to prevent the severe capital losses they sustained earlier this decade. Alternative investments have come to satisfy both requirements.

¹ Watson Wyatt's
² The Russell Survey