Seventy Percent of Institutional Investors Use Alternative Asset Classes

They are turning to alternatives to mitigate market risk.

Institutional investors are increasingly turning to alternative assets to diversify as they navigate an environment characterized by low yields, geopolitical concerns and a growing set of investment risks, according to Allianz Global Investors’ annual Risk Monitor survey.

Seventy percent invest in alternative investment classes. Among this group, 31% say it is to diversify their portfolio. Other reasons they gave: to establish a low correlation with other strategies (19%), to seek higher returns than conventional debt or equity investments offer (17%) and to reduce portfolio volatility (17%).

However, 48% said they would invest more in alternatives if they felt more confident about measuring the risk associated with these asset classes. This is particularly true for sovereign wealth funds (66%) and banks (55%), but less so for pension funds (44%), insurance companies (48%), family offices (47%) and endowments and foundations (38%). Sixty-two percent say they need better tools to manage the risks associated with these asset classes.

To achieve particular goals, 30% of institutional investors turn to real estate equity and infrastructure equity. Another 24% use relative value/arbitrage strategies. When seeking higher returns, these investors use private corporate equity (49%), event-driven strategies (30%) and infrastructure equity (27%).

For risk management, institutional investors’ favorite alternative asset classes are relative value/arbitrage strategies (24%), macro strategies (20%), trading strategies (16%) and infrastructure debt (14%).

Sixty-four percent of institutional investors that use alternatives say they feel prepared to deal with investment risks. Among those who do not use alternatives, only 54% can say the same.

Allianz’s findings are based on interviews that CoreData Research conducted in April and May with 755 institutional investors across North America, Europe and Asia-Pacific representing $34.2 trillion in assets under management.

The full report can be viewed here.