next generation alternative invstng
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JP Morgan ChaseTRANSCRIPT
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I N V E S T O R S R E S P O N D
FOR INSTITUTIONAL
USE ONLY
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About JPMorgan Asset Management
For more than a century, institutional investors have turned
to JPMorgan Asset Management to skillfully manage their
investment assets. This legacy of trusted partnership has
been built on a promise to put client interests ahead of
our own, to generate original insight, and to
translate that insight into results.
Today, our advice, insight and intellectual
capital drive a growing array of innovative
strategies that span U.S., international and
global opportunities in equity, fixed income,
real estate, private equity, hedge funds, infra-
structure and asset allocation.
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In the first quarter of 2008, we talked to approximately 200
institutional investors about alternatives. The response was
unequivocal. Alternative strategies, including private equity,
real estate and absolute return/hedge funds are now establishedcomponents of many institutional portfolios. At the same time,
infrastructure, portable alpha and “green” investing are defining
their strategic footprint.
JPMorgan Asset Management’s leadership position in alternative
investing has given us a unique perspective in understanding the
needs of corporate plans, public funds, endowments, foundations,
and other institutions. Our surveys, workshops and conferences
enable our clients to gain a better understanding of alternative
investing. They also provide a forum for exchanging ideas amongpeers, learning about new investment strategies and discovering
innovative solutions to today’s investment challenges.
We are deeply grateful to all the institutions that took part in our
research and made this report possible. We hope this report will
provide you with a benchmark view of the state of U.S. institutional
investors in their quest for investment success.
Sincerely,
John H. Hunt
CEO Institutional Americas
JPMorgan Asset Management
FOREWORD
We first reported a growing demand for alternative
strategies in our 2005 investment survey. Sincethat time, changes in the investing and economic
environments, along with evolving regulations have
spurred further innovation and accelerated the
adoption of alternative investment strategies.
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EXECUTIVE OVERVIEW
KEY FINDINGS
PART 1: ANALYSIS BY ASSET CLASS
10 ABSOLUTE RETURN/HEDGE FUNDS
14 PRIVATE EQUITY
17 REAL ASSETS: REAL ESTATE
19 REAL ASSETS: INFRASTRUCTURE
22 REAL ASSETS: OTHER
23 PORTABLE ALPHA
25 NET LONG (130/30)
26 GREEN/SUSTAINABLE
PART 2: ANALYSIS BY INVESTOR SEGMENT
28 CORPORATE PENSION PLANS
32 PUBLIC PENSION FUNDS36 ENDOWMENTS & FOUNDATIONS
CONCLUSION
PARTIAL LIST OF PARTICIPANTS
TABLE OF CONTENTS
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NEXT GENERATION ALTERNATIVE INVESTING
EXECUTIVE OVERVIEW
Over the last decade, “alternative” investments
have seen steady growth, to the point thatmany in the industry question whether they aretruly “alternative” anymore. Our most recentsurvey of some of the largest U.S. institutionalinvestors should put to rest any lingeringdoubt. The survey confirms that these strate-gies—now established components of manyinstitutional portfolios—are no longer“alternative” at all.
In fact, alternatives now play an essential role
in institutional portfolio strategies, and weexpect across-the-board allocation increasesdespite recent market turmoil.
Growth in assets, growth in options
Our survey results clearly indicate that institutionalinvestors as a whole are embracing all availableoptions within alternatives—both the more traditionaland the cutting edge. Strong inflows are expected for
the largest and most well-established alternative assetclasses (real estate, private equity, absolute return/hedge funds), as well as a range of new, innovativestrategies that are already taking hold.
For this survey, we expanded the alternatives universeto include several of these newer strategies and found
substantial growth potential in categories such as:
n Infrastructure, which is becoming an importantdiversification strategy within “real assets,” a cate-gory increasingly used to refer to “tangible” assets(e.g., real estate, commodities, infrastructure, farm-land/timber, etc.) which can help preserve the “real”value of portfolios.
n Green/sustainable investing, which captures arapidly emerging trend—a non-traditional the-matic investment approach that blends economic/market opportunity with policy considerations andenvironmental concerns.
n Portable alpha and net long (130/30) strategies,which may not be categorized as “alternatives,” buthave a philosophical or functional connection to
alternatives. These strategies seek to help investors
add alpha to traditional allocations, either by port-ing alpha from other sources, or making traditionalassets work harder and smarter. Alternative strate-gies and investment approaches are often used to
generate the additional alpha.
Alternatives are helping investors meettheir objectives
As investor sophistication increases—and plans are
less constrained in their views of asset class boundaries
and the management of alpha and beta—alternatives
are playing an ever more important role in enhancingportfolio risk/return characteristics. An expanding
opportunity set within alternatives gives investors
many more options regarding how and where to
incorporate them.
Ultimately, some of the most interesting survey data
concerns the question of “why?”
Here we see that within each investor segment—cor-
porate plans, public funds, and endowments and foun-
dations—alternative asset classes are being custom fit
into portfolios with a specific purpose, to help addresssector-specific issues and challenges. These new tools
have been a critical complement to traditional portfo-
lios, and planned increases to alternatives are a testa-
ment to their overall effectiveness in helping investors
meet their unique objectives.
The future of alternatives will not be without chal-
lenges—e.g., how to access top managers and high-
quality opportunities. Liquidity, transparency, educa-
tion, and resource issues will also grow with the size
of these allocations. But our survey suggests that, in
the view of investors, such concerns continue to beoutweighed by the benefits investors are reaping and
continue to expect from alternatives.
We believe the survey tells a powerful and very posi-
tive story about alternatives—one that will continue
to unfold over the next several years.
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2 NEXT GENERATION ALTERNATIVE INVESTING
Research methodology
This report provides the findings from JPMorgan
Asset Management’s 2008 institutional investor
survey—Next Generation Alternative Investing .
The study, conducted earlier this year, canvassed senior
decision makers at the largest U.S. corporate and pub-
lic defined benefit plans, and Endowments and Foun-
dations (E&Fs)—191 institutions representing
approximately $1.26 trillion in assets (Exhibit 1).
The survey was conducted for JPMorgan Asset Man-
agement by Greenwich Associates, primarily via
phone interviews, during first quarter, 2008. Corpo-
rate and public plan respondents were drawn from
Greenwich Associates’ annual survey of plan sponsors
and includes those investing or planning to invest in
alternatives.
Exhibit 2 provides a breakdown of respondents by
assets under management within each investor seg-
ment. It highlights the fact that public fund respon-
dents are, on average, three to four times larger than
corporate plan and E&F respondents. Average alloca-
tions in our survey report are not dollar-weighted.
Therefore, it is important to keep these size differences
in mind when considering potential asset flows,
because a similar percent change in allocation could
generate much larger asset flows from public funds
than from corporate plans or E&Fs.
Exhibit 3 shows the funded status of pension plan
respondents. The management of funded status can
influence strategic asset allocation policies and the use
of alternatives by these investors.
Allocation data was self-reported by survey partici-pants, and all results are based on available responses
to specific survey questions. The respondent base may
vary across different asset categories—i.e., some
respondents did not provide data in every category, or
answer every question. Such reporting inconsistencies
may lead to discrepancies: in some cases the reported
“total alternative allocation” does not exactly match
the sum of individual alternative asset class alloca-
tions. However, these discrepancies do not affect either
the direction or degree of the trends identified in this
survey.
* Total and average $AUMs exclude 4 corporate and 2 public funds for which assets were not reported. ”Other” refers to 9 Taft Hartley plans. Due to small sample size,Taft-Hartley responses are only included in “total respondent” results.
Exhibit 1: Survey respondent base*
56 E&Fs($3 bn avg AUM)9 Other
($14.7 bn avg AUM)
191 respondents $1.26 trilliontotal AUM(as of 12/31/07)
50 Public funds($14 bn avg AUM)
76 Corporate plans($4.2 bn avg AUM)
Exhibit 3: Distribution (%) of pension plan respondents by funded status
Funded status Total (114) Corporate plans (63) Public funds (44) Taft-Hartleys (7)
Less than 80% 9% – 25% –
80-95% 33 20% 50 43%
96 to 100% 28 37 16 29
Over 100% 29 43 9 29
As of 12/31/07. Results may not sum to 100% due to rounding.
Exhibit 2: Distribution (%) of respondents by size ($ AUM)
Size ($ billions) Total (185) Corporate plans * ( 72) Public funds (48) E&Fs (56) Taft-Hartleys (9)
Avg AUM $4.2 bn Avg AUM $14 bn Avg AUM $3 bn Avg AUM $14.7 bn
Under $1 6% 4% 2% 11% 22%
$1–1.9 34 29 21 54 22
$2–4.9 32 46 25 20 33
$5–9.99 11 13 15 5 11
$10–14.9 9 6 13 11 –
$15–19.9 2 – 6 – –$20–29.9 2 1 4 – –
$30+ 5 1 15 – 11
As of 12/31/07. Results may not sum to 100% due to rounding. $ AUM for corporate and public respondents is for defined benefit plans.
EXECUTIVE OVERVIEW
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NEXT GENERATION ALTERNATIVE INVESTING
KEY FINDINGS
I. Alternative or essential?
Alternatives have become an essential part of
portfolio strategies for institutional investors
employing them. Growth expectations for
alternatives remain strong despite current
market disruptions, dislocations, and sub prime
contagion. Institutional assets are shifting from
the traditional to the alternative.
n Among total survey respondents, average alloca-
tions to alternatives exceed 18% and are expected
to exceed 22% by 2010—an increase of over 20%
(Exhibit 4). Endowments and Foundations (E&Fs)continue to lead the way with a projected 36% of
portfolio assets committed to alternatives by 2010.
n Growth is being driven by a pervasive need to
enhance and diversify returns, and alternative allo-
cations are being funded by a shift in allocations
away from traditional assets. Across all investor
segments, broad issues of “diversification” and
“increased returns” were cited as the primary
drivers of changes to alternative allocations.
n While there are distinct differences among investor
segments, an overall alternatives allocation of 20%to 30% is seen as about right. Only 37% of respon-
dents said this range was too high, and 20% said it
was too low (Exhibit 5). On average, E&F portfo-
lios already exceed these allocation levels.
n Surprisingly, the rate of growth of alternatives
overall—and even within asset classes—seems
unaffected by recent market turmoil. In some cases,
allocation increases are the result of investors seek-
ing opportunity in current market dislocations.
Average allocations across all respondents (%)Total EquityFixed IncomeAlternatives
55 51
63
57 5261
57 56 51 47
2626
2630
33
2827 27
19
18
18 2211 13 15
1116 18
2936
0
20
40
60
80
100
2007
Total Corporate Public E&F
2010 2004 2007 2010 2004 2007 2010 2007 2010
Exhibit 4: Allocations continue to shift from the traditional to the alternative
Data for 2007 and 2010 is from this current 2008 survey, while data for 2004 is from the JPMorgan Asset Management New Sources of Return Survey , 2005. In bothsurveys, corporate and public respondents were drawn from the largest 350 U.S. pension plans, but the composition of the respondent base varies. Base for 2005survey: corporate (64), public (50); base for 2008 survey (2007, 2010): total (146, 133), corporate (62, 56), public (39,34), E&F (43,40).
Note: Totals may not sum to 100% due to rounding. Allocations presented here are averages of allocations provided at the total alternatives, fixed income and equitylevels. Similarly, allocations to alternative asset categories (e.g., those presented in Exhibit 6 ) are averages of allocations provided at the specific strategy level. Thenumber of available responses may differ across component strategies. Therefore, component data will not necessarily sum to these total alternative values.
Exhibit 5: Overall, respondents feel an allocation of 20% to 30%to alternatives is about right
“Would you say a 20% to 30% asset allocation to alternatives is...” Asked of all
respondents. Respondent base is in parenthesis.
% total respondents (178)
Too low?
20%
Just right?
43%
Too high?
37%
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4 NEXT GENERATION ALTERNATIVE INVESTING
II. Sizing up strategies
Growth in average allocations is expected across
all major alternative asset classes, with absolute
return/hedge funds and private equity growing
the fastest ( Exhibit 6 ).
n Absolute return/hedge funds: These strategies
have the highest average allocation of any alterna-
tive asset class—for current investors in this asset
class (Exhibit 7), as well as across all survey respon-
dents, including investors and non-investors
(Exhibit 8). We estimate that these strategies will
account for 40% of net inflows into alternatives
through 2010.
n Private equity: Growth for this more “traditional”
alternative will also be strong, led by 62% of current
investors planning to increase allocations, the high-est across all alternative asset classes (Exhibit 9).
Given an already high participation rate (75%), the
percentage of new investors adding this asset class is
expected to be relatively low (Exhibit 10).
n Real assets/real estate: This mainstream portfolio
component will experience more modest growth—
receiving a boost from new and existing E&F inves-
tors—with an increasing emphasis on diversifica-
tion into non-U.S. assets.
III. Diversification within alternatives
Investors are emphasizing diversification within
their alternative portfolios—among various estab-
lished and new types of alternative strategies, as
well as across geographic regions.
n As investors seek to diversify holdings within
“real assets,” two asset classes in this category are
expected to see substantial growth:
– Real assets/infrastructure is expected to see its
relatively small investor base more than doubleover the next three years—led by new corporate
and public plan investors (Exhibit 10).
KEY FINDINGS
Average total portfolio allocations (%)—investors and non-investors
Absolute return/hedge funds
Private equity
Infrastructure/other real assets
Real estate
5.1 5.84.5 5.0
7.2 7.3
3.9 5.4
2.4
1.1 1.3
0.6 1.2
3.5
4.94.9
6.5
4.35.2
4.45.1 6.4
9.17.4
9.3
4.5
5.8 3.9
5.8
14.1
16.3
1.7
0
5
10
15
20
25
30
35
40
2007 2010 2007 2010 2007 2010 2007
Total(146) (133)
Corporate(62) (56)
Public(39) (34)
E&F (43) (40)
2010
Exhibit 6: Allocations are expected to increase across majoralternative asset classes
Note: Allocations presented here are averages of available responses. Thenumber of available responses may differ across component strategies.Allocations in Exhibit 4 are averaged across all available responses at the totalalternatives level. Therefore, total alternative allocations in Exhibit 4 do notrepresent the sum of component allocations presented here.
2007 2010
Absolute return/hedge funds
(89) (77)
Privateequity
(94) (81)
Realestate
(101) (88)
6.66.6
11.5
8.67.0
13.4
Average allocation (%)
Exhibit 7: Average allocations across all current investors in…
Based on respondents currently investing in the specified asset class.Respondent base is in parenthesis.
5.14.9
7.46.5
5.8
9.3
Absolute return/hedge funds(129) (116)
Private equity(126) (112)
Real estate(130) (116)
Average allocation (%) 2007 2010
Exhibit 8: Average allocations across all respondents for…
Average allocations are calculated across all respondents—including investorsand non-investors in the specified asset class. Respondent base is inparenthesis.
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NEXT GENERATION ALTERNATIVE INVESTING
– “Other real assets” (e.g., oil & gas, commodi-
ties, farmland/timber, maritime, etc.) will see the
greatest growth from allocation increases by cur-
rent investors—largely E&Fs—with moderate
growth among new investors (Exhibits 9, 10).
n Portable alpha is currently used by 31% of respon-
dents; an additional 15% expect to add these inno-
vative strategies by 2010 (Exhibit 11).
Getting the big picture:
Exhibit 6, in combination with Exhibits 7
through 11, capture our broad findings regard-
ing the growth of individual alternative assetclasses across the total survey respondent
base. Similar exhibits throughout this report
provide additional detail at the investor seg-
ment level.
n Exhibit 6 shows average alternative alloca-
tions—current 2007 and anticipated 2010—
across all survey respondents, including both
current investors and non-investors (those
planning to invest and those not considering
investing) in the specified asset classes. Thisview captures the impact on growth of both
new investors adopting these strategies and
existing investors planning to increase or
decrease current allocations.
n Exhibit 7 shows current 2007 and expected
2010 average allocations across all respon-
dents currently investing in the specified
asset class.
n Exhibit 8 shows current 2007 and expected2010 average allocations for all respon-
dents—including both investors and non-
investors.
n Exhibit 9 shows the percentage of respon-
dents currently investing in and planning to
increase (decrease) allocations to the speci-
fied asset class.
n Exhibit 10 shows current investor participa-
tion rates, as well as the percentage planning
to invest.
n Exhibit 11 shows current investor participa-
tion rates, as well as the percentage planning
to invest in newer “alternatives.”
KEY FINDIN
Absolute return/hedge funds
(180)
Privateequity(178)
Realestate(182)
Infrastructure(152)
Otherreal assets
(175)
38
13
7675
59
5 9 14
10 7
Currently invest Plan to invest% of respondents
Exhibit 10: Participation rates—percentage of total respondentscurrently investing or planning to invest in…
Respondent base is in parenthesis.
Absolute return/hedge funds
(103)
Privateequity(125)
Realestate(125)
Infrastructure(17)
Otherreal assets
(58)
5362
4653 53
-100
-5-7 -7
Plan to increase Plan to decrease% of respondents
Exhibit 9: Percentage of all current investors planning to increase(decrease) allocations to…
Based on respondents currently investing in the specified asset class.Respondent base is in parenthesis.
31
24
1215
119
Portablealpha(170)
Net long equity(130/30)
(173)
Green,sustainable
(148)
Currently invest Plan to invest% of respondents
Exhibit 11: Participation rates—percentage of total respondentscurrently investing or planning to invest in…
Respondent base is in parenthesis.
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6 NEXT GENERATION ALTERNATIVE INVESTING
n Net long equity strategies (e.g., 130/30) are used
by about a quarter of investors, with 9% intending
to add them, primarily to enhance returns of tradi-
tional equity allocations (Exhibit 11).
n Green/sustainable, with a small current investorbase, showed surprising strength, with a significant
boost expected from public funds over the next
three years.
n Survey results reveal a fast-growing emphasis on
geographic diversification. Among all alternative
asset classes, this trend is most evident in real
estate. However, the appeal of non-U.S. assets
is also evident in private equity.
IV. Investor dynamicsAlthough all investors share a common need
for return enhancement and diversification,
the growth dynamics of alternatives play out
differently in each investor segment, due to
unique issues and concerns—e.g., institutional
objectives, regulatory challenges, financial and
board constraints, and levels of experience.
(In-depth discussion of the dynamics within
individual investor segments is provided in
subsequent sections of the paper.)
n Corporate plan sponsors appear somewhat more
cautious than other investors with regard to alterna-
tives. We see this posture driven primarily by regu-
latory and accounting reforms, which pose a two-
pronged challenge for corporate plan sponsors:
controlling the impact of the plan on corporate
financials, while still earning returns sufficient to
meet benefit obligations.
Among corporate plans, specifically, over the next
three years:
– Absolute return/hedge funds, infrastructure, andportable alpha will have the highest rate of new
investors.
– Private equity shows the highest percentage of
current investors planning to increase their
allocations.
– While absolute return/hedge fund allocations
may see somewhat slower growth among corpo-
rate versus public funds, we expect this asset class
to account for the largest increase in alternative
dollar flows for corporate pension portfolios.
n For public funds, the main issue of concern is con-
sistently delivering required returns to meet benefit
obligations over the long term, leading to a sharpfocus on improving risk-adjusted performance of
the overall portfolio. As a result, the current pos-
ture of public funds toward alternatives is more
active than for corporate plans, particularly as they
diversify beyond real estate and catch up with cor-
porate allocations to absolute return/hedge funds.
– In absolute return/hedge funds, our survey indi-
cates that public funds will show strong growth
among new and existing investors in this asset
class.
– Private equity will also show strong growth,driven by increasing allocations from public
funds currently investing in the asset class.
– For real estate—a longtime anchor of public
funds’ alternative portfolios—we expect average
allocations to remain flat, with a shift toward
international and global investments.
– Infrastructure will be a growth area, as public
funds work to diversify their sometimes large
real estate holdings with other real assets.
– Green/sustainable is also growing rapidly, albeitfrom a small base, with a participation rate
expected to nearly triple by 2010.
– Finally, GASB accounting for Other Post-
employment Benefits (OPEB) is in transition,
and at the time of our survey, there was a great
deal of uncertainty around whether, and to what
extent, these benefits would be pre-funded, as
well as the role alternatives are likely to play in
investing assets set aside for funding.
n For Endowments and Foundations (E&Fs) the
challenge is to maintain current payouts while pro-tecting the real value of assets. Due to their unique
skill set and experience level, E&F alternative allo-
cations are 75% to 100% larger than those for pub-
lic and corporate plan sponsors, and they have a dis-
tinct approach to alternative investing (at least
among the larger investors):
– They generally have a more pronounced opportu-
nistic posture.
KEY FINDINGS
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NEXT GENERATION ALTERNATIVE INVESTING
KEY FINDIN
– They are typically comfortable with much higher
allocations.
– Some view portfolio components purely in terms
of alpha and beta.
For E&Fs, we expect to see the following trendsover the next several years:
– Strong growth in private equity, led by a 42%
increase in average allocations among E&Fs
currently investing in the asset class.
– A slower growth rate in absolute return/hedge
fund allocations for those currently investing.
– Real estate will be a dynamic asset class for
E&Fs—reflecting their opportunistic bias.
– In “other real assets”, E&Fs are expected to con-
tinue to lead the way with the highest participa-tion rates by far, as well as the highest rate of
new entrants.
V. Meeting expectations
For the vast majority of investors surveyed,
alternative investments are currently meeting
performance expectations, across asset classes.
n Currently, investors show a relatively high rate of
satisfaction across all alternative categories, with
E&Fs showing a slightly lower satisfaction leveloverall (Exhibit 12).
VI. Growing pains
Growth continues, despite some common
concerns and constraints.
n As the number of participants in alternative mar-
kets increases, and we see larger inflows, investorsare most concerned about the potential impact on
performance. Two of the top three concerns cited by
respondents focused on declining returns and over-
crowding of the alternatives space (Exhibit 13).
Concerns do vary to a degree across client segments:
– E&Fs show the highest sensitivity to issues of
falling performance and overcrowding.
– Public funds are notably more concerned about a
strain on their staffing and oversight capabilities.
– Corporate plans are more worried than theircounterparts about volatility, particularly with
respect to funded status.
n Among the most frequently cited factors preventing
investment in additional alternative asset classes are
the need to obtain board approval and to gain a
greater degree of comfort/knowledge with specific
alternative investments.
n While fees are not cited among the top investor
concerns, there is clearly emerging pressure on fees.
Investors believe that fees are fair as long as
Exhibit 12: Percentage of respondents indicating that performance expectations are being met
“I am going to read you a list of asset classes and would like you to tell me what long-term (10 to 15 years) return benchmarks your plan applies to each asset class,and whether they are currently meeting performance expectations.” Respondent base is in parenthesis.
Total (175)
Corporate plans (68)
Public funds (45)
E&Fs (56)
8587
9388
9290
91 92
84
8887
90
88
9794
97
10097
96100
100100100100
Real estate
Commodities
Infrastructure
Absolute returnstrategies
Private equity
Hedge funds
(77)(26)(10)(38)
(84)(27)(15)(39)
(75)(23)(10)(38)
(108)(38)(33)(32)
(31)(5)(3)
(23)
(14)(5)(1)(8)
Most commonly mentioned benchmarks
Infrastructure: No clear benchmark
Commodities: CPI plus 500 bps
Real estate: NCREIF Index
Absolute return: T-bills plus 400–600 bps
Private equity: S&P plus 300–500 bps
Hedge funds: T-bills plus 300–600 bps
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8 NEXT GENERATION ALTERNATIVE INVESTING
Exhibit 14: Emerging pressure on fees
“Which one of the following statements best describes your view of fees charged to manage alternative strategies?” Respondent base is in parenthesis.
4
2
30
20
36
2
9
13
40
31
4
4
19
29
34
4
5
21
30
33
Our plan is quite comfortablewith fees charged foralternative strategies
Fees are coming down, butour fund is still hesitant to
implement
Fees should be viewed on a
per unit of alpha basis
Fees charged for alternativeinvestments are too high
Fees are fair, as long asreturn expectations are met
Total (175)
Corporate plans (68)
Public funds (45)
E&Fs (56)
% of respondents
KEY FINDINGS
performance expectations are met, which should be
a red flag to managers that there could be a back-
lash on fees, or a greater demand for performance-
based fee schedules, should performance start to lag
expectations (Exhibit 14).
Within specific investor segments:
– Public funds showed the highest absolute
sensitivity to fees.
– E&Fs were by far the strongest advocates for
charging fees per unit of alpha.
Exhibit 13: Greatest concerns as alternatives become more popular with respect to managing portfolios in the current market environment
“As alternative investments become more popular, what is your greatest concern with respect to managing your plan assets/portfolio in the current marketenvironment?” Multiple responses accepted. Respondent base = 176.
% of total respondents citing…
1
1
3
3
5
6
7
8
10
10
1113
15
23
Global recession
Counterparty relationship
Blow up/melt down
Accounting concerns
3Valuations
Fees
Volatility
Transparency
Staffing/oversight capabilties
Quality managers/tools
Risk
No concernsOvercrowding of space
13Other
Liquidity
Falling returns/performance
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NEXT GENERATION ALTERNATIVE INVESTING
PART 1. ANALYSISBY ASSET CLASS
PREFACE
While no one should be surprised that overall use of
alternatives is quite high—and still growing—our
survey did uncover some unexpected trends within
this overall growth story:
n Within our survey base, the largest dollar flows
into absolute return/hedge fund strategies over the
next several years are expected to come from public
funds.
n Real estate should see significant inflows from E&F
investors, who also plan large increases to private
equity allocations.
n Newer categories of alternatives—e.g., infrastruc-
ture and other real assets, green/sustainable, porta-
ble alpha and net long equity (130/30)—all show
strength and will see significant increase in usage
by 2010.
n A substantial shift toward international and global
assets is taking shape in real estate and, to a some-
what lesser extent, in private equity.
In addition, as alternatives become an essential part of
institutional portfolios, there is a steady blurring of
lines as to what constitutes an “alternative” and in
which asset-allocation buckets different strategies
belong. For example, equity 130/30 strategies, while
hedge fund-like in their use of shorting, are most
often categorized as traditional “equity.” Infrastructurecould fall into private equity or real estate, depending
on the underlying asset and type of fund used to
access it. Real estate itself is increasingly bucketed
under “real assets.” And green/sustainable could be
classified as infrastructure (e.g., power projects), long
only (e.g., eco-friendly stocks), or even real estate
(e.g., green building funds).
As the use of alternatives continues to grow, these
strategies will open new possibilities for investors to
rethink traditional notions of both asset class and asset
allocation. And we believe that alternatives will con-tinue to present greater opportunity to add alpha
through new approaches to efficient portfolio design.
The following asset-class discussions provide
details of how these growth and diversification
trends are playing out within specific segments
of the alternatives market:
A. Absolute return/hedge funds
B. Private equity
C. Real assets: Real estate
D. Real assets: Infrastructure
E. Real assets: Other
F. Portable alpha
G. Net long (130/30)
H. Green/sustainable
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10 NEXT GENERATION A LTERNATIVE INVESTING
5345
6054
-7 -7 -8Total(103)
Corporate(29)
Public(20)
E&Fs(50)
Increasing Decreasi ng
% of respondents
Respondent base is in parenthesis.
Exhibit 18: Percentage of current absolute return/hedge fundinvestors planning to increase (decrease) allocations by 2010
9.3
5.8 5.8
16.3
14.1
7.4
4.5 3.9
Total(129)(116)
Corporate(52)(47)
Public(34)(28)
E&Fs(40)(40)
2007 2010
Average allocation (%)
Averages reflect investors and non-investors. Respondent base is inparenthesis.
Exhibit 17: Average allocations to absolute return/hedge fundsamong all respondents
ABSOLUTE RETURN/HEDGE FUNDS Absolute return/hedge funds are the youngest
of what could be called traditional alternative
asset classes—i.e., real estate, private equity,
absolute return/hedge funds. As such theyshow the lowest overall participation rate, as
corporate and public pension plans steadily
ramp up their exposure. But thanks to relatively
higher liquidity and the ability to diversify
across a range of strategy types, these strate-
gies also show the highest average portfolio
allocation of any alternatives category—across
existing investors in this asset class, as well as
across total survey respondents. Clearly, for
those that use these strategies, they are an
essential portfolio component.
Over the next few years we expect to see
dynamic growth in absolute return/hedge funds
from a number of sources. It is one of the few
asset classes expecting strong growth from both
new investors adding these strategies and exist-ing investors increasing their allocations. This
dual-engine growth dynamic differs from other
types of alternatives, where growth is expected
to come predominantly from either existing
investors or new investors, but seldom from a
more balanced combination of both.
59
41 42
98
10
1613
Total(180)
Corporate(75)
Public(50)
E&Fs(53)
% of respondents
Investing Planning to
Respondent base is in parenthesis.
Exhibit 15: Percentage of respondents investing or planning toinvest in absolute return/hedge funds by 2010
13.4
9.6 8.9
18.1
15.6
7.48.5
11.5
Total(89)(77)
Corporate(27)(24)
Public(18)(17)
E&Fs(37)(35)
2007 2010
Average allocation (%)
Respondent base is in parenthesis.
Exhibit 16: Average allocations among current absolute return/hedge fund investors
ANALYSIS BY ASSET CLASS: ABSOULUTE RETURN / HEDGE FUNDS
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NEXT GENERATION ALTERNATIVE INVESTING
n Growth highlights in absolute return/hedge funds:
– Absolute return/hedge funds are expected to
account for over 40% of net new dollars invested
in alternatives by survey respondents in the next
three years.
– A rapid rate of increase is expected in the per-
centage of corporate and public plans using this
asset class: +30% and +35%, respectively, by
2010 (Exhibit 15).
– Allocations should increase at a rate of 13%
to 20% among current investors (Exhibit 16),
and 16% to 49% across total respondents
(Exhibit 17), with public funds showing the
fastest rate of allocation increase.
– More than half of current investors plan toincrease allocations (Exhibit 18)—again, with
public funds showing the strongest increases.
n Public funds are expected to be the most dynamic
investors and a key driver of asset flows—a surpris-
ing result when compared with our 2005 survey
results for hedge funds. In the earlier survey, public
funds trailed corporate plans in participation (10%
versus 30%) as well as in existing investor alloca-
tions (4% versus 5% of overall portfolio assets).1
By 2010, we expect the reverse to be true for abso-
lute return/hedge funds, with public funds
– the largest percentage planning to invest
– the largest percentage of existing investors
increasing allocations (with no decreases)
– the fastest rate of allocation increase across all
investor segments
– participation rates exceeding that of corporate
plans
n E&Fs still show a healthy appetite for further
allocations to absolute return/hedge fund strategies,
despite a near 100% participation rate and alloca-
tion rates substantially higher than other investor
segments. More than half of E&Fs are targeting stillhigher allocations, with expected allocations among
current investors to exceed 18% of total portfolio
assets by 2010 (Exhibit 16).
n All investors cite a common need to improve risk-
adjusted portfolio performance as a chief driver of
allocations to absolute return/hedge funds—des
variously as increased diversification, volatility
reduction, and/or return enhancement (Exhibit 19).
ANALYSIS BY ASSET CLASS: ABSOULUTE RETURN / HEDGE FUN
“What is driving these allocation changes to absolute return/hedge funds?” Multiple responses accepted. Respondent base is in parenthesis.
Exhibit 19: Most frequently cited reasons for increasing allocations to absolute return/hedge funds
Corporate plans (21)
Public funds (18)
E&Fs (26)
% of respondents
Availableopportunities
Increase fixed income,liability/regulatory
Decreasefixed Income/equity
Improve risk/return
Increase return
Diversification/decrease volatility
12
0
15
15
15
35
6
0
0
17
39
0
19
5
5
24
4850
cribed
1 JPMorgan Asset Management – New Sources of Return Survey, 2005
showing:
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12 NEXT GENERATION A LTERNATIVE INVESTING
Exhibit 20: Percentage of respondents currently investing or planning to invest in absolute return/hedge funds via...
“Does your plan currently/plan to access absolute return/hedge funds via…” Multiple responses accepted. Asked of those currently investing or planning to investin absolute return/hedge funds. Respondent base is in parenthesis.
Fund-of-funds,single strategy
Single manager,multi-strategy
Single manager,single strategy
Fund-of-funds,multi-strategy
% of respondents investingor planning to invest
2
4
4
2
3
0
3
17
27
17
24
37
45
27
34
58
28
48
14
10
5
10
15
Currently investing Planning to
Corporate plans (41)
Public funds (29)
E&Fs (52)
n But individual investor segments show different
preferences and sensitivities in how they access these
strategies:
– Vehicle preferences show clear distinctions
among investor segments (Exhibit 20):
• E&Fs use single manager funds most often—a
possible reflection of their longer experience
and higher degree of confidence with these
types of strategies.
• Corporate and public plans, by comparison,
use fund-of-funds vehicles when accessing
multi-strategies, but use single managers for
single strategies. This could be a reflection of
a preference for core/satellite approaches. In
addition, fund-of-funds can be an efficient
way for new investors to establish a diversified
portfolio, gain access to top managers and
accomplish their due diligence in a less
resource-intensive way—important consider-
ations for these investor segments, which have
low participation rates and a high number of
new investors adding this asset class.
– “Top 3 challenges” are also seen differently across
investors. Though “transparency” is cited as the
top challenge for all investors, E&Fs differ mark-
edly from corporate and public pension plans on
other issues (Exhibit 21).
• E&Fs showed the least sensitivity to fees and
the highest sensitivity to manager access.
• Corporate and public plans showed much
higher sensitivity to fees and headline/reputa-
tion risk.
• Public funds showed the most concern about
board approval.
– Lock-ups longer than one year affect investor
decisions to varying degrees across segments
(Exhibit 22). Here again, we see the establishedpattern of E&Fs showing the greatest flexibility.
Corporate plans showed the most cautious
approach, with public funds in the middle.
ANALYSIS BY ASSET CLASS: ABSOULUTE RETURN / HEDGE FUNDS
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NEXT GENERATION ALTERNATIVE INVESTING
“What are the top three challenges you face when considering investments in absolute return or hedge funds?” Asked of all respondents. Multiple responsesaccepted. Respondent base is in parenthesis.
Exhibit 21: Top three challenges to investing in absolute return/hedge funds
25
21
11
7
9
9
37
45
46
24
24
15
2
10
20
11
11
19
30
24
4
Transparency
High feearrangements
Headline risk/reputation risk
Liquidity
Access totop-performing
managers
Resources andexpertise
Board approval
% of respondents citing...
Corporate plans (56)
Public funds (41)
E&Fs (54)
Public funds
(Based on 40 respondents)
Yes 68%
No 33%
Corporate plans
(Based on 61 respondents)
Yes 44%
No 56%
E&Fs
(Based on 50 respondents)
Yes 82%
No 18%
Exhibit 22: Would you invest in an absolute return/hedge fund strategy with a lock-up longer than one year?
“Have you invested or would you consider investing in funds requiring a lock-up longer than the typical one year?” Asked of all respondents.
ANALYSIS BY ASSET CLASS: ABSOULUTE RETURN / HEDGE FUN
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14 NEXT GENERATION A LTERNATIVE INVESTING
PRIVATE EQUITY Private equity, a more “traditional” alternative,
shows strong participation within each investor
segment. Overall participation in this asset
class (across “all respondents”) is on par withreal estate, a longtime staple of alternative
portfolios.
Private equity also shows a high percentage
of current investors (62%) planning to increase
their allocations—the highest percentage of
any alternative asset class. As a result, private
equity can be expected to see strong growth
over the next several years, due to substantial
inflows from existing investors as they manage
the impact of the private equity cycle (commit-ments, investments, distributions) on reaching
target allocations.
n Growth highlights in private equity:
– E&F investors currently lead the way with
nearly 100% participation in this asset class
(Exhibit 23), the largest average allocations, and
the greatest expected allocation increase (+42%)by 2010—more than double the rate of increase
for corporate or public funds—both for current
investors in this asset class, and across all survey
respondents (Exhibits 24, 25).
– Public pension plans are not far behind E&Fs,
however, with a participation rate of 76% and
nearly a third of non-investors adding this asset
class by 2010 (Exhibit 23). In addition, public
funds have the highest percentage of current
investors planning to increase allocation by 2010
(Exhibit 26).
Additionally, while public fund allocations are
expected to grow 18% by 2010—less than half
Total(125)
Corporate(44)
Public(32)
E&Fs(46)
6175
5262
-6-5-5 -4
% of respondents
Increasing Decreasing
Respondent base is in parenthesis.
Exhibit 26: Percentage of current private equity investorsplanning to increase (decrease) allocations by 2010
Total(126)(112)
Corporate(50)(46)
Public(32)(25)
E&Fs(40)(38)
6.5
5.2 5.1
9.1
4.94.3 4.4
6.4
2007 2010
Average allocation (%)
Averages reflect investors and non-investors. Respondent base is inparenthesis.
Exhibit 25: Average allocations to private equity among allrespondents
Total(178)
Corporate(71)
Public(46)
E&Fs(54)
75
63
7693
5
4
7
4Investing Planning to% of respondents
Respondent base is in parenthesis.
Exhibit 23: Percentage of respondents investing or planning toinvest in private equity by 2010
Total(94)(81)
Corporate(33)(29)
Public(25)(18)
E&Fs(35)(33)
8.67.8
6.6
10.5
6.6
7.4
5.66.6
2007 2010 Average allocation (%)
Respondent base is in parenthesis.
Exhibit 24: Average allocations among current private equityinvestors
ANALYSIS BY ASSET CLASS: PRIVATE EQUITY
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NEXT GENERATION ALTERNATIVE INVESTING
as much as E&Fs—public fund respondents’
portfolios are, on average, more than four times
larger. So private equity should see substantial,
and perhaps even greater dollar flows from
public funds than from E&Fs.
– Corporate plans have higher allocations, on
average, than public funds and a comparable
rate of allocation increase among current inves-
tors (Exhibit 24). But corporate plans also show
the lowest participation rate in private equity
(Exhibit 23) and the lowest percentage of
current investors planning allocation increases
(Exhibit 26). We believe this posture is consis-
tent with their cautious overall approach to alter-
natives over the next several years.
n International allocations are strong and expected togrow—with an average non-U.S. allocation of 17%
of private equity portfolios, across all current
investors.
– E&Fs show the greatest comfort and diversifica-
tion abroad (Exhibit 27), with the highest par-
ticipation rate in every category except “interna-
tional developed.” They are much more comfort-
able with Asia/Pacific markets, and significantly
more open to global strategies. This is not sur-
prising given E&Fs’ overall expertise with alter-
natives and their need for diversification as their
alternative portfolios continue on a rapid growth
trajectory.
– Corporate and public plans, by comparison, show
a preference for Europe and other international
developed markets. However, corporate plans
appear to be diversifying more quickly into Asia/
Pacific and emerging markets.
n Where fund vehicles are used to access privateequity, investor choices are similar to those for
hedge funds—with corporate and public funds
using fund-of-funds vehicles for multi-strategy
funds, and single managers for single strategies,
E&Fs have a clear preference for single manager
funds (Exhibit 28).
“Where, other than the U.S., does your plan currently or plan to invest in the future in private equity?” Asked of respondents currently or planning to invest in privateequity. Multiple responses accepted. Respondent base is in parenthesis.
Exhibit 27: Percentage of respondents currently investing or planning to invest in private equity in...
25
31
15
19
13
18
5
8
50
42
40 2
11
8
4
8
2
3
2
4
3
8
4
0
6
4
50
17
35
21
Europe
Asia/Pacific
International
developed
Global
Emerging markets
Corporate plans (48)
Public funds (38)
E&Fs (52)
Currently investing Planning to
ANALYSIS BY ASSET CLASS: PRIVATE EQU
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16 NEXT GENERATION A LTERNATIVE INVESTING
Exhibit 28: Percentage currently investing or planning to invest in private equity via…
“Does your plan currently/plan to access private equity funds via…” Respondent base is in parenthesis.
446
1155
031
419
811
238
0
3
0
17
16
23
27 2
526
258
Fund-of-funds,multi-strategy
Single manager,multi-strategy
Fund-of-funds,single strategy
Single manager,single strategy
Corporate plans (48)
Public funds (38)
E&Fs (52)
Currently investing Planning to
ANALYSIS BY ASSET CLASS: PRIVATE EQUITY
“[What is driving our allocation increase to private equity is] diversification,
liquidity premium, enhanced returns ... [We are looking at] venture, small
and medium-size buyouts.”— Endowment
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NEXT GENERATION ALTERNATIVE INVESTING
REAL ASSETS: REAL ESTATEReal estate is the most commonly used alterna-
tive asset class, with overall participation rates
slightly higher than private equity. And some-
what surprisingly, the survey showed no overallpullback from real estate, despite recent market
turmoil (this survey was conducted during the
first quarter of 2008).
In fact, more than a third of non-investors indi-
cated that they would be adding this asset class
by 2010, and allocations should see a slight
increase—both across current investors and all
respondents—driven primarily by inflows from
E&Fs. Within this trend, however, there is a sig-
nificant shift expected toward non-U.S. assets,across all investor segments, led by corporate
plans and E&Fs.
n Growth highlights in real estate:
– E&Fs, which have the lowest overall allocations
to real estate (Exhibits 30, 31), are expected to
show the greatest rate of increase over the next
three years, with a strong international emphasisand a reduction in the U.S. share of real estate
portfolio assets.
– Among public funds—the largest group of
real estate investors—allocations are expected
to remain flat among current investors (Exhibit
30), as well as among all public fund respon-
dents (Exhibit 31).
– Corporate plans are anticipating slightly higher
overall allocations (Exhibits 30, 31), but still
have the lowest participation rate (Exhibit 29)
and the lowest percentage of current investorsplanning allocation increases (Exhibit 32).
Total(182)
Corporate(72)
Public(48)
E&Fs(53)
9
10
13
6376
9079
4
Currently invest Plan to invest% of respondents
Respondent base is in parenthesis.
Exhibit 29: Percentage of respondents investing or planning toinvest in real estate by 2010
E&Fs(29) (27)
Public(34) (27)
Corporate(35) (31)
Total(101) (88)
7.06.8
7.5
5.46.6 6.6
6.8 7.4
2007 2010 Average allocation (%)
Respondent base is in parenthesis.
Exhibit 30: Average allocations among current real estate investors
Total(130) (116)
Corporate(52) (47)
Public(35) (28)
E&Fs(40) (38)
5.85.0
5.4
3.9
7.2
5.14.5
7.3
2007 2010 Average allocation (%)
Averages reflect investors and non-investors. Respondent base is in parenthesis.
Exhibit 31: Average allocations to real estate among allrespondents
E&Fs(40)
Public(39)
Corporate(38)
Total(125)
-10 -13 -8
60
4446
32
-10
% of respondents
In creasin g Decreasi ng
Respondent base is in parenthesis.
Exhibit 32: Percentage of current real estate investorsincreasing/(decreasing) allocations by 2010
ANALYSIS BY ASSET CLASS: REAL EST
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18 NEXT GENERATION A LTERNATIVE INVESTING
E&F (16)
Public (26)
Corporate (14)
-14.6
5.1
-1.8
2.9
1.0 12.3
11.110.6
3.0
Global Internat ional U.S . d omestic
“What percentage of your REITs portfolio is currently invested in or do you planto invest in (region) by 2010?” Asked of respondents currently or planning toinvest in direct real estate and/or REITs. Respondent base is in parenthesis.
Exhibit 35: Expected net change in percentage of REITs portfolioallocated to…
-8.3
-11.5
9.0
3.7
1.8
1.9
6.8
-4.43.6
E&F (29)
Public (32)
Corporate (39)
Global Internat ional U.S. domest ic
“What percentage of your direct real estate portfolio (ex-REITS) is currentlyinvested in or do you plan to invest in (region) by 2010?” Asked of respondentscurrently or planning to invest in direct real estate and/or REITs. Respondentbase is in parenthesis.
Exhibit 34: Expected net change in percentage of direct realestate portfolio allocated to…
Exhibit 33: Percentage of respondents currently investing or planning to invest in real estate in…
“Where does your plan currently or plan to invest in real estate?” Asked of respondents currently investing or planning to invest in real estate. Multiple responsesaccepted. Respondent base is in parenthesis.
1020
1210
09
211
213
218
21313
718
422
278
410
810
813
812
12
819
815
877
412
849
64
810
48
28
Emerging markets
Asia/Pac
U.K.
Canada
Global
Internationaldeveloped
ContinentalEurope
U.S.
Corporate plans (52)
Public funds (45)
E&Fs (49)
Currently investing Planning to
n E&F investors are expected to make a substantial
commitment to real estate over the next several
years. We believe that E&F’s large anticipated
commitment to real estate reflects their generally
more opportunistic posture. Over the next three
years, E&Fs will have:
– the highest percentage of new investors, with
more than 60% of E&F non-investors adding
real estate to their portfolios (Exhibit 29)
– a participation rate nearly equaling public funds
by 2010
– the largest allocation increases of any investor
segment: +26% among current investors and
+38% across all E&F respondents (Exhibit 30,
– the largest percentage of current investors
increasing allocations (Exhibit 32)
n A strong global diversification trend is expected.
– Real estate investors currently show a strong biastoward domestic U.S. assets—with E&Fs show-
ing less domestic reliance than other investors
(Exhibit 33). But survey data suggests that this
will change dramatically over the next several
years, with a greater percentage of investors
investing abroad (Exhibit 33). Additionally,
international and global shares of both real estate
and REIT portfolios are expected to increase
significantly (Exhibits 34, 35).
31)
ANALYSIS BY ASSET CLASS: REAL ESTATE
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NEXT GENERATION ALTERNATIVE INVESTING
REAL ASSETS: INFRASTRUCTUREGrowth in this asset class is expected to be
strong, with the overall participation rate among
institutional investors doubling by 2010, led by
a high rate of new corporate plans and publicfunds adding this asset class. In addition, more
than half of current investors expect to increase
allocations.
n Strong growth is expected from new investors
among corporate plans and public funds (Exhibit
– Public funds will lead infrastructure investing;
we believe that this strong growth reflects a need
to diversify large real estate holdings with other
real assets. Corporate plans will see similar
growth, driven largely by diversification needs,as well as the long-term, bond-like profiles of
core infrastructure investments.
– E&Fs currently have the highest participation
rate in infrastructure investing, but results sug-
gest growth in this investor base could slow—
perhaps reflecting a need for non-investors to
gain more knowledge of and comfort with these
investments.
n Despite strong growth, infrastructure still poses
challenges for investors:
– Investors show wide disparity in how infrastruc-
ture is classified in terms of asset allocation
(Exhibit 37), i.e., as private equity, real assets,fixed income, or its own discrete asset class. We
believe that such wide variations result from the
diversity in underlying assets and vehicles used
to access infrastructure opportunities.
– In addition, a large percentage of respondents
indicated that they lack familiarity and comfort
with these strategies, which suggests that asset
managers will be required to provide more inves-
tor education and support for overall growth in
this asset class to continue (Exhibit 38).
Total(152)
Corporate(69)
Public(46)
E&Fs(29)
1310 11
21
1416
17
3
Investing Planning to% of respondents
Respondent base is in parenthesis.
Exhibit 36: Percentage of respondents investing or planning toinvest in infrastructure by 2010
“To which asset class does/would your plan (be likely to) allocate infrastructure investments?” Asked of all respondents. Respondent base is in parenthesis. Multipleresponses accepted.
Exhibit 37: How do investors classify infrastructure?
1745
31Other
49
17Fixed income
13 23
14
Real estate
3814
28
Private equity
4232
22Real assets
% of respondents classifyinginfrastructure as...
Corporate plans (36)
Public funds (22)
E&Fs (24)
36):
ANALYSIS BY ASSET CLASS: INFRASTRUCT
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20 NEXT GENERATION A LTERNATIVE INVESTING
Exhibit 38: What is preventing investment in infrastructure?
“What are the top two reasons preventing your plan from investing in infrastructure strategies?” Asked of all respondents not currently or planning to invest ininfrastructure. Respondent base is in parenthesis.
2
5
6
10
5
4
55
13
5
6
15
5
8
15
2
818
44
54
23
% of respondents citing…
High correlation toother assets
High volatility
Risk
Less potential forhigher return
Lack of liquidity
Plan/board policy
Lack of knowledge/comfort
Corporate plans (48)
Public funds (22)
E&Fs (41)
n North America will see the lion’s share of inflows
into infrastructure investment (Exhibit 39)—unlike
real estate where we see a clear global diversification
trend. However, investors cite “global capabilities”
as one of their top criteria when evaluating infra-
structure managers, suggesting that this initial
domestic bias may reverse (as it has in real estate)
as investors’ comfort and expertise increase.
n Investors share a strong opportunistic view of infra-
structure (Exhibit 40):
– Not surprisingly, E&Fs show the strongest bias
toward opportunistic strategies.
– Corporate plans, by comparison show the lowest
preference for opportunistic strategies and the
highest preference for “debt-like” strategies, pos-sibly a reflection of their emphasis on managing
surplus volatility.
n Closed-end funds are expected to be the most com-
monly used vehicle (Exhibit 41):
– An approximately equal percentage of investors
plan to add closed-end funds and open-end funds.
– However, closed-end funds will continue to have
much higher overall usage—46% for closed-end
funds versus 25% for open-end funds. We believe
that this bias could be a function of availability,
with the asset management industry currently
offering largely closed-end investment vehicles.
– Only an additional 5% of respondents plan to
add direct infrastructure investments to their
portfolios—perhaps not surprising given inves-
tors’ stated lack of familiarity and comfort with
this asset class.
ANALYSIS BY ASSET CLASS: INFRASTRUCTURE
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NEXT GENERATION ALTERNATIVE INVESTING
Exhibit 40: What type of infrastructure investments are of greatest interest?
“Based on your risk/return objectives, which of the following would your plan be likely to invest in, in the future?” Asked of all respondents. Respondent base is inparenthesis. Multiple responses accepted.
% of respondents likely to invest in...
Other 2723
Debt-like22
31
0
0
Development(New)
3933
23
Existing 39
2035
Opportunistic83
5342
Corporate plans (26)
Public funds (15)
E&Fs (23)
“Geographically, where will you be investing in the future in infrastructure” Asked of all respondents currently or planning to invest in infrastructure. Respondentbase = 23. Multiple responses accepted.
Exhibit 39: Where will investors invest in infrastructure?
9
13
13
13
17
26
65
Other
Int'l Developed
Europe
Asia/Pacific
Emerging Markets
Global
North America
% of respondents planning to invest in...
“Does your plan currently or plan to access infrastructure via...?” Asked of all respondents currently or planning to invest in infrastructure. Respondent base = 40.Multiple responses accepted.
Exhibit 41: How are investors currently accessing (planning to access) infrastructure?
Currently accessing Planning to accessListed infrastructure
securities
Direct investments
Open-end funds
Closed-end funds
3
13
10
28
3
5
15
18
% of respondents
ANALYSIS BY ASSET CLASS: INFRASTRUCT
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22 NEXT GENERATION A LTERNATIVE INVESTING
REAL ASSETS: OTHER(Commodities, oil & gas, timber/
farmland, maritime, and precious metals)
While just over a third of all respondents saythey invest in “other real assets” (commodities,
oil & gas, timber/farmland, maritime and pre-
cious metals), that figure can be a bit mislead-
ing, because E&F investors are far more active in
this asset class than either corporate plans or
public funds. Moderate growth can be expected
over the next several years, driven predomi-
nantly by existing investors increasing their
allocations.
n
E&F investors should drive most of the growth inthis asset class given that:
– E&Fs have the highest participation rate of any
investor segment (Exhibit 42).
– Nearly a third of E&Fs not currently investing
plan to add “other real assets” by 2010.
n Diversification appears to be the primary driver of
investment in “other real assets” (Exhibit 43)—the
other key drivers are split almost equally—increas-
ing returns, meeting allocation targets, and hedging
inflation.
n Investors do not show a strong preference in terms
of investment vehicles (Exhibit 44)—closed-end
funds hold a slight edge (38%) with direct invest-
ments slightly lower (31%), and open-end funds
somewhat below that.
Total(175)
Corporate(71)
Public(46)
E&Fs(51)
38
18
30
757
6
4
8Investing Planning to% of respondents
Respondent base is in parenthesis.
Exhibit 42: Percentage of respondents investing or planning toinvest in “other real assets” by 2010
Inflationhedge
Meet targetallocation
Increase inexpected
returns
Diversification
% of respondents citing...
8
11
11
33
“What is driving these allocation changes to other real asets?” Asked ofrespondents currently investing or planning to invest in other real assets.Respondent base = 36. Multiple responses accepted.
Exhibit 43: Most frequently cited reasons for increasingallocations to “other real assets”
Other
Primaryopen-end
funds
Directinvestments
Primary
closed-endfunds
% of respondents
110
619
328
632
Currently accessing
Planning to access
Exhibit 44: Percentage currently accessing or planning to access“other real assets” via...
“Does your plan currently/plan to access investments in other real assets via...” Asked of respondents currently investing or planning to invest in other realassets. Respondent base = 78.
ANALYSIS BY ASSET CLASS: OTHER REAL ASSETS
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NEXT GENERATION ALTERNATIVE INVESTING
E&Fs(47)
Public(44)*
Corporate(69)
Total(170)
31 2836
28
1526
25
15
Using % of respondents Planning to Considering investing*
* Among public funds, a very high percentage (about 25%) indicated they wereconsidering investing in portable alpha, but not committed to implementing by2010. Respondent base is in parenthesis.
Exhibit 45: Percentage of respondents using or planning to useportable alpha by 2010
PORTABLE ALPHAWe include portable alpha in this survey
because these strategies—which seek to add
alpha without changing a portfolio’s underlying
strategic allocation—are clearly non-traditionaland often employ alternative strategies, or an
investment approach closely linked to alterna-
tives, as the driver of alpha.
n Key highlights for these investment strategies
include:
– Currently three in 10 respondents use portable
alpha, and that figure is expected to grow by
approximately 50% over the next few years
(Exhibit 45).
– Corporate plans are expected to see the greatest
increase in the percentage of plans employing
these strategies, with participation rates nearly
doubling—to over 50% by 2010.
– Public funds have the highest participation ratethus far, but that could slow in the near term, as
many public funds are “considering” employing
these strategies, but have not yet committed to
implementing them (Exhibits 45, 46).
n For the largest segment of potential users (corporate
plans and E&Fs) implementation of portable alpha
strategies is being driven by issues of “potential
alpha generation” and “diversification” (Exhibit
“What is driving the changes to your plan’s use of portable alpha strategies?” Asked of those planning to increase/decrease their use of portable alpha strategies.Multiple responses accepted. Respondent base is in parenthesis.
Exhibit 46: Most frequently cited reasons for changes to the use of portable alpha strategies
% of respondents citing…
0
0
46
31
14
52
14
38
5
5
24
19
Shifting allocationsfrom bonds
Considering implementing
Diversification
Potential alphageneration
Corporate plans (21)
Public funds (21)
E&Fs (13)
46).
ANALYSIS BY ASSET CLASS: PORTABLE AL
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24 NEXT GENERATION A LTERNATIVE INVESTING
Exhibit 47: What sources of beta are being used in portable alpha strategies?
Source: Greenwich Associates annual survey of plan sponsors and endowments with over $1billion in total plan assets. Multiple responses accepted. Respondentbase is in parenthesis.
Other
InternationalEquities
DomesticFixed Income
U.S. Equity
5
21
68
84
16
13
29
77
2
14
36
78
Corporate plans (50)
Public funds (31)
E&Fs (19)
% of respondents citing…
ANALYSIS BY ASSET CLASS: PORTABLE ALPHA
– For the majority of portable alpha investors, U.S.
equity is the source of beta (Exhibit 47), though
over half of E&Fs using these strategies have ported
alpha over domestic fixed income.
– Sources of alpha vary, with fixed income anddomestic equity the most frequently employed,
followed by hedge funds and international equity.
“What is driving [our use of portable alpha] is low interest rates and more alpha octane on the bonds.”— Corporate plan
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NEXT GENERATION ALTERNATIVE INVESTING
NET LONG(e.g., 130/30 strategies)
Only a minority of respondents (29%) consider
net long (130/30) strategies an “alternative.”
The vast majority include these strategies in
their “long only” allocations ( Exhibit 48 ). We
included them in this study because they are
generally less benchmark-constrained, and they
rely on approaches philosophically close to
“alternatives” (e.g., shorting).
n Approximately one quarter of respondents use these
strategies, with reasonably strong growth expected
among both corporate plans and public funds
(Exhibit 49).
n “Shorting” was cited by respondents as the topreason preventing them from using net long strat-
egies—citing “risk of using short strategies” and
“track record/experience of the manager in using
short strategies.”
n Investors showed approximately equal interest in
both fundamental and quantitative strategies, as
well as both international and domestic strategies.
29% Alternative
investments
allocation
% classifying as part of...
71% Long only
allocation
“Where do you allocate net long (130/30) strategies?” Asked of respondentsinvesting in net long (130/30) strategies. Respondent base = 63.
Exhibit 48: Most respondents classify net long (130/30)strategies as part of long-only assets
Total(173)
Corporate(71)
Public(44)
E&Fs(49)
2421 23
30
910
14
6
Investing Planning to
Respondent base is in parenthesis.
Exhibit 49: Percentage of respondents investing or planning toinvest in net long (130/30) equity strategies by 2010
“The way we look at [net long (130/30) investing is that it]
frees up the manager to more fully access their capabilities.
Getting more out of the dollar we invest.”— Public fund
ANALYSIS BY ASSET CLASS: NET LONG (130/
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26 NEXT GENERATION A LTERNATIVE INVESTING
GREEN/SUSTAINABLEGreen/sustainable investing is showing
surprising strength, especially among E&F
investors and public funds. Key highlights for
this non-traditional thematic investmentapproach include:
n E&Fs have led the way thus far, with 27% of
respondents investing and another 6% planning
to invest in green strategies, bringing the total to
a third of E&F investors (Exhibit 50). New E&F
investors, however, are expected to be few in the
near term.
n Public funds, by contrast, will be the engine of
growth, nearly tripling their participation in green
investing by 2010. The increase is likely due, in
part, to a concerted effort by some state officials
to channel more funding toward this area.
n Corporate plans will double their participation rate
for this category but are starting from a small base
and are expected to be slower in moving into these
strategies (Exhibit 50).
n The most popular approach to green investing is
through direct private investment (Exhibit 51),
with closed-end funds expected to gain ground,
and open-end funds used only rarely.
E&Fs(33)
Public(42)
Corporate(67)
Total(148)
127
10
27
11
7
19
6
Investing Planning to
Respondent base is in parenthesis.
Exhibit 50: Percentage of respondents investing or planning toinvest in green/sustainable strategies by 2010
Other
Both openand closed-
end funds
Primaryopen-end
funds
Direct privateinvestments
Primaryclosed-endfunds
12 3
6
63
3
159
1218
Currently accessing
Planning to access
“Does your plan currently/plan to access green/sustainable investments via…” Asked of all respondents investing or planning to invest. Respondent base = 34.
Exhibit 51: Percentage of respondents accessing or planning toaccess green/sustainable strategies via…
“There is a social aspect to this ... you have to weigh the social against the fiduciary responsibility ...” — Public fund
“We are invested in infrastructure that focuses
on green/sustainable.” — Endowment
ANALYSIS BY ASSET CLASS: GREEN/SUSTAINABLE
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NEXT GENERATION ALTERNATIVE INVESTING
PREFACE
As with the discussion of asset class growth, we begin
by noting that no one should be surprised that insti-
tutions are committed to increasing their overall port-
folio allocations to alternatives. There are, however,
some notable results within the overall growth story
that highlight the flexibility of alternatives to meet
specific investor needs:
n Corporate plans, though more cautious than other
investors, still plan steady increases in alternatives
to meet their need for diversified sources of return.
This need goes hand-in-hand with their efforts to
increase fixed income allocations and durations in
order to manage interest rate risk, while decreasing
and diversifying equity exposure to manage the vol-
atility of returns. Increasing exposure to absolute
return/hedge funds, implementing portable alpha
strategies and taking advantage of the debt-like
nature of long-term infrastructure investments can
be expected to play a significant role in their efforts
to meet benefit obligations while managing surplus
volatility.
n Public funds, challenged to meet their long-term
benefit obligations by consistently generating
required returns, appear to be moving quite quickly
to diversify and expand their alternative portfolios
(traditionally heavily weighted toward real estate).
This effort will be led by a substantial move into
absolute return/hedge funds. Additionally, public
funds will be one of the strongest drivers of a wide
range of newer alternatives—e.g., infrastructure and
“other real assets,” portable alpha, net long (130/30),
and green/sustainable investments.
n E&F investors, generally less constrained in their
investment policies than other institutions, are stillratcheting up their alternative allocations—to well
over a third (36%) of portfolio assets by 2010—
despite already having the highest participation
rates and highest allocations across a majority of
alternative asset classes. Some E&Fs even say there
is no limit to how high those allocations could go.
These investors are looking for opportunistic invest-
ments and new ways to diversify their alternative
sources of return—and to maintain performance of
their portfolios, even as the alternatives marketplace
becomes more crowded.The different demands, experience levels, resource
constraints and organizational challenges facing each
investor segment are driving different alternative
strategy choices and rates of adoption.
The following discussions provide details about
how these growth and diversification trends are
playing out within specific client segments.
A. Corporate pension plans
B. Public pension funds
C. Endowments & foundations
PART 2. ANALYSIS BYINVESTOR SEGMENT
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28 NEXT GENERATION A LTERNATIVE INVESTING
Duration, in years
9.4
5.7
7.46.7
12.4
6.65.7
5.45.34
6
8
10
12
14
Duration12 months ago
Currentduration
Expected futureduration
All corporate plans (69)
Corporate plans extending (25)Public funds (27)
Respondent base is in parenthesis.
Exhibit 54: Corporate plans expect to significantly extend fixedincome duration
CORPORATE PENSION PLANSCorporate pension plans anticipate steady
increases in alternative allocations, particularly
in private equity and absolute return/hedge
funds—where average allocations across all cor-porate plan respondents are expected to increase
by 21% and 29% respectively, by 2010.
However, despite this steady progress, corporate plans
appear to be more cautious in expanding their alterna-
tive allocations than public funds or E&Fs. On aver-
age, corporate plans will have the lowest total alterna-
tive allocations, and a majority of corporate plan spon-
sors say that a 20% to 30% overall portfolio allocation
to alternative assets is too high (Exhibit 52). In addi-
tion, corporate plans show the lowest percentage of
current investors increasing allocations to majoralternative asset classes (absolute return/hedge funds,
private equity, real estate).
We believe this cautious posture is driven primarily
by regulatory and accounting reforms (e.g., the Pen-
sion Protection Act, SFAS 158, an anticipated “Phase
II” to the FASB pension accounting project, and FSP
SFAS 132(R)-a), which address a range of issues, such
as: minimum funding requirements, corporate bal-
ance sheet impacts, income statement presentation,
and disclosures. These on-going reforms will continue
to pose a two-pronged challenge for corporate plan
sponsors—controlling the impact of the plan on cor-
porate financials, while still earning returns sufficient
to meet benefit obligations.
To address their unique situation, corporate plan
sponsors are continuing to decrease traditional equity
allocations while significantly increasing fixed income
allocations (Exhibit 53). Allocations, however, don’t
tell the whole story.
Corporate plans expect to implement a large shift
in duration within their fixed income portfolios
(Exhibit 54). While duration shifts have been accom-
plished in the past largely through investing in longer
duration cash bonds, nearly half of corporate plans
intending to change duration are considering using
swaps to synthetically implement the change
(Exhibit 55).
The notable issue raised by these shifts is that corpo-
rate plan sponsors are deeply engaged in the process ofmanaging their pension plans’ funded status volatility
in a rapidly changing regulatory environment. We see
their more cautious approach to alternatives as related
to these challenges.
% corporate respondents (68)
Too low?7%
Just right?40%
Too high?53%
“Would you say a 20% to 30% asset allocation to alternatives is....” Asked ofall respondents. Respondent base is in parenthesis.
Exhibit 52: Corporate plans’ view of a 20% to 30% allocation toalternatives
63 57 52
26 30 33
11 13 15
0
20
40
60
80
100%
2004(64)
2007(62)
2010(56)
Alternatives
Fixed Income
Total Equity
% of assets
Respondent base is in parenthesis.
Exhibit 53: Corporate plans are shifting to fixed income andalternatives
ANALYSIS BY INVESTOR SEGMENT: CORPORATE PENSION PLANS
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NEXT GENERATION ALTERNATIVE INVESTING
ANALYSIS BY INVESTOR SEGMENT: CORPORATE PENSION PLA
17
21
48
31
45
0
0
11
29
46
Turn-key product to changeduration, while enhancing alpha
(e.g., portable alpha)
Futures to syntheticallychange duration
Swaps to synthetically
change duration
Increase total fixedincome allocation
Shift to longer duration bonds,without changing total fixed
income allocation
% of respondents
% who used in the past (28)
% likely to use in the future (29)
Exhibit 55: Corporate plans’ use of futures, swaps and turnkey products to manage duration is likely to increase
“Which one of the following approaches were used to extend the duration of your plan’s fixed income assets?” Asked of corporate plans whose duration hadincreased vs. 12 months ago.“Which of the following approaches would likely be used to extend the duration of your plan’s fixed income assets?” Asked of corporate plans considering shorteningor extending duration. Respondent base is in parenthesis.
“How we run the asset side is driven by what is going on in the regulatory environment, condition of our balance
sheet and volatility.”— Corporate plan
“We are in the process of extending the duration of our fixed income portfolio. We are trying to get the duration of our fixed income portfolio
more in line with our underlying plan liabilities.” — Corporate plan
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30 NEXT GENERATION A LTERNATIVE INVESTING
ANALYSIS BY INVESTOR SEGMENT: CORPORATE PENSION PLANS
Exhibit 57: Average allocations across corporate respondentscurrently investing in…
Based on respondents currently investing in the specified asset class.Respondent base is in parenthesis.
6.66.6
8.5
7.8 6.8
9.6
Absolute return/hedge funds
(27) (24)
Private equity(33) (29)
Real estate(35) (31)
2007 2010 Average allocations (%)
Average allocations are calculated across all corporate respondents—includinginvestors and non-investors in the specified asset class. Respondent base is inparenthesis.
Exhibit 58: Average allocations across all corporate respondentsfor…
Absolute return/hedge funds
(52) (47)
Private equity(50) (46)
Real estate(52) (47)
4.54.34.55.2 5.0
5.8
Average allocations (%) 2007 2010
Growth Highlights
Even as they wait for clarity and finality—on issues
such as transparency, reporting, valuation, etc.—our
findings suggest that corporate plans recognize the
benefits of alternatives in improving overall risk-adjusted return and managing volatility. Alternatives
have played, and will continue to play, a key role in
this effort. Significant trends in this investor segment
include:
n Absolute return/hedge fund strategies are
expected to see the highest corporate plan inflows
over the next three years—with approximately 60%
from current investors and 40% from new inves-
tors. Relative to private equity and real estate, these
strategies show:
– a higher number of new investors (Exhibit 56)
– higher portfolio allocations among current inves-
tors (Exhibit 57) and, by 2010, across all
respondents as well (Exhibit 58)
– a large number of current investors increasing
their allocations (Exhibit 59)
n Private equity is a more established portion of cor-
porate alternative portfolios with a participation
rate roughly 50% higher than for absolute return/hedge funds. Most inflows into private equity will
be from these existing investors, with relatively few
non-investors adding this asset class (Exhibit 56).
– More than half (52%) of current investors will
be increasing private equity allocations (Exhibit
– In dollar terms, over 80% of growth is expected
to come from these existing investors.
– A key reason for increasing private equity (in
addition to enhancing returns and diversifying
the portfolio) is to meet allocation targets
(Exhibit 60).
n Real estate growth will be moderate among corpo-
rate plans and, surprisingly, will see most inflows
Respondent base is in parenthesis.
Exhibit 56: Participation rates—percentage of corporate respondents currently investing or planning to invest in…
Currently invest Plan to invest
Absolute return/hedge funds
(75)
Privateequity
(71)
Real estate(72)
Infrastructure(69)
Otherreal assets
(71)
Portablealpha(69)
Net long equity(130/30)
(71)
Green,sustainable
(67)
41
63 63
10
28
74 7
18 21
101310
26
6
16
% of respondents
59).
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NEXT GENERATION ALTERNATIVE INVESTING
ANALYSIS BY INVESTOR SEGMENT: CORPORATE PENSION PLA
Percents represent the difference in the average percentage of the real estate(or REIT) portfolio allocated to the specified region in 2010 minus the averageallocation in 2007. For respondents currently or planning to invest in real estateand/or REITs. Respondent base is in parenthesis.
Exhibit 61: Corporate plans expect further geographicdiversification of their real estate and REIT portfolios
REITs porfolio (14)
Real estateportfolio (39)
-1.8
-4.4
1.0
3.6
12.3
6.8
Global
International
U.S. domestic
Expected net change in % of realestate (or REIT) portfolio allocated to…
Multiple responses accepted. Respondent base = 17.
Exhibit 62: Corporate plans’ most frequently cited reasons forincreasing real estate allocations
% of corporate respondents citing…
Other
Overall increasein alternatives
Inflation hedge
Increase return
Investment policy
Available opportunities(timing/specific)
Diversificationrisk management
6
6
6
18
18
29
35
Based on corporate respondents currently investing in the specified assetclass. Respondent base is in parenthesis.
Exhibit 59: Percentage of corporate respondents currentlyinvesting in and planning to increase (decrease) allocations to…
4552
32
513
7
Plan to increa se Pla n to decrease
Real estate(38)
Private equity(44)
Absolute return/hedge funds
(29)
% of respondents
Multiple responses accepted. Respondent base = 19.
Exhibit 60: Corporate plans’ most frequently cited reasons forincreasing private equity allocations
% of corporate respondents citing…
Other
Improve risk return
Availableopportunities
Increase alternativeallocation
Meet targetallocation
Diversification(overall and PE)
Increase return
11
5
11
11
16
26
26
coming from new investors—with relatively few
current investors increasing allocations, and some
planning to decrease.
– Ninety-five percent of the estimated dollar
growth in corporate real estate investment willcome from new investors—with average alloca-
tions across all corporate respondents expected
to remain on par with private equity.
– Ten percent of corporate plan respondents
(a quarter of non-investors) expect to add real
estate to their portfolios (Exhibit 56).
– By comparison, only about 30% of current
investors are planning to increase allocations,
while 13% plan to decrease (Exhibit 59).
– Growth across existing and new corporate realestate investors will be lead by international/
global allocations, with the U.S. domestic share
of real estate portfolios expected to decline
(Exhibit 61).
– One of the primary reasons cited by those plan-
ning to increase allocations to real estate was
timing and available opportunities (Exhibit 62).
n Infrastructure—a long-maturity, high-quality
asset—presents an opportunity for further returnenhancement and diversification with 10% of corpo-
rate plans currently investing, a number that is
expected to more than double by 2010 (Exhibit 56).
n Portable alpha is the one area where corporate
plans lead other client segments in new investor
growth. This asset class will see the sharpest
increase in participation rates for corporate plans—
nearly doubling from 28% to 54% by 2010.
These strategies can help address the need for diver-
sified sources of return as allocations to equitydecline and bond portfolio allocations increase.
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32 NEXT GENERATION A LTERNATIVE INVESTING
PUBLIC PENSION FUNDSFor public funds, the main issue of concern is
consistently delivering required returns to meet
benefit obligations over the long term. The vast
majority of plans (over 75%) are currently under-funded, leading to an even sharper focus on
improving risk-adjusted performance of the over-
all portfolio ( Exhibit 63 ). As a result, public funds
are diversifying sources of return to improve over-
all portfolio performance, and alternatives are
playing an increasingly important role. A majority
of public funds (56%) now say that an overall
alternatives allocation of 20% to 30% is either
just right or too low ( Exhibit 64 ).
Overall alternative allocations are expected to increasefrom 15.6% to 18.1% of total portfolio assets between
2007 and 2010, a gain of 16%. This increase in alter-
natives is being balanced by a slight decrease in tradi-
tional assets, primarily equities (Exhibit 65).
In addition, the “diversification” theme carries
through to public funds’ approach to investing in
alternatives: they are becoming increasingly active in
asset classes where they have not historically had high
participation. Absolute return/hedge funds will see a
large percentage of new investors adding these strate-
gies, as will some of the newer asset classes, such as
infrastructure, net long (130/30), and green/
sustainable.
The goal of improving risk-adjusted portfolio perfor-
mance is evident across multiple questions in the sur-
vey. For example, in both absolute return/hedge funds
and private equity—which will see the largest dollar
inflows from public funds—respondents cite perfor-
mance and diversification among the most important
factors driving allocation changes to both of these
asset classes (Exhibits 66, 67).
Exhibit 63: The majority of public funds are underfunded
Respondent base = 44 public funds.
% of public funds, by funded status—year-end 2007
Under 80%
25%
80–95%
50%
96–100%
16%
Over 100%
9%
“Would you say a 20% to 30% asset allocation to alternatives is...” Asked of allpublic respondents. Respondent base is in parenthesis.
Exhibit 64: Public funds’ view of a 20% to 30% allocation toalternatives
Just right?
54%
Too high?
44%
Too low?
2%
% total respondents (48)
Respondent base is in parenthesis.
Exhibit 65: Public funds are shifting toward alternatives
0
20
40
60
80
100%
2004(50)
2007(39)
2010(34)
61 57 56
2827 27
11 16 18
Alternatives Fixed Income Total Equity
% of assets
ANALYSIS BY INVESTOR SEGMENT: PUBLIC PENSION FUNDS
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NEXT GENERATION ALTERNATIVE INVESTING
Respondent base = 18. Multiple responses accepted.
Exhibit 66: Public funds’ most frequently cited reasons forincreasing allocations to absolute return/hedge funds
% of public fund respondents citing…
17
6
17
39
50
Other
Availableopportunities
Improve riskreturn
Increase return
Diversification/decrease volatility
Respondent base = 20. Multiple responses accepted.
Exhibit 67: Public funds’ most frequently cited reasons forincreasing allocations to private equity
% of public fund respondents citing…
15
5
5
10
15
30
30
Other
Overall increaseto alternatives
Availableopportunities
Improve riskreturn
Diversification(overall and PE)
Meet targetallocation
Increase return
ANALYSIS BY INVESTOR SEGMENT: PUBLIC PENSION FUN
“My biggest concern [with respect to managing plan assets
in the current environment] is hitting our target return with
an acceptable level of volatility and risk.”— Public fund
“[We are] moving from fixed income to hedge funds, [seeking]
more equity-like returns with bond volatility.”— Public fund
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34 NEXT GENERATION A LTERNATIVE INVESTING
Growth Highlights
In most alternative categories, public funds will have
caught up to, and even surpassed, the allocations of
corporate plans by 2010. Significant trends in this
investor segment include:n Absolute return/hedge funds is the key growth
story for public funds, with a majority of inflows
(60%) coming from new investors. Participation
rates here have increased almost four-fold (to 42%)
since our first survey in 20052 and are expected to
exceed that of corporate plans by 2010. Over the
next three years, relative to other investor segments
(see page 10), public funds will show the:
– highest percentage of new investors in absolute
return/hedge funds: 16% of public fund respon-
dents (Exhibit 68)
– largest allocation increases: +20% among current
investors (Exhibit 69), and +49% across all pub-
lic fund respondents (Exhibit 70).
– highest percentage of current investors planning
to increase allocations: 60% increasing, with
none decreasing (Exhibit 71).
n Private equity currently shows a high participa-
tion rate of 76% (Exhibit 68), but relatively fewnew investors over the next few years. We expect
most private equity inflows from public funds to
come from existing investors: overall portfolio
allocations should increase by 18% among current
investors (Exhibit 69), and by 16% among all
public fund respondents (Exhibit 70).
n Real estate has been the alternative of choice for
most public funds, accounting for an estimated
50% of alternative portfolios. Participation in this
asset class is approaching 100% (Exhibit 68), with
portfolio allocations remaining steady, despite cur-
rent market dislocations (Exhibits 69, 70). The
dynamic growth in real estate will come from a
strong shift toward international/global allocations,
Based on respondents currently investing in the specified asset class.Respondent base is in parenthesis.
Exhibit 69: Average allocations across public fund respondentscurrently investing in…
Absolute return/hedge funds
(18) (17)
Private equity(25) (18)
Real estate(34) (27)
7.5
5.6
7.46.6
7.48.9
2007 2010 Average allocation (%)
Average allocations are calculated across all public fund respondents—including investors and non-investors in the specified asset class. Respondentbase is in parenthesis.
Exhibit 70: Average allocations across all public fundrespondents for…
Absolute return/hedge funds
(34) (28)
Private equity(32) (25)
Real estate(35) (28)
5.8
7.2
4.43.95.1
7.3
2007 2010 Average allocation (%)
Respondent base is in parenthesis.
Exhibit 68: Participation rates—percentage of public fund respondents currently investing or planning to invest in…
Currently invest Plan to invest
11
3036
23
7
90
10
76
42
4 40
Absolute return/hedge funds
(50)
Privateequity(46)
Real estate(48)
Infrastructure(46)
Otherreal assets
(46)
Portablealpha(44)
Net long equity(130/30)
(44)
Green,sustainable
(42)
16 17 1914
% of respondents
2 JPMorgan Asset Management New Sources of Return Survey, 2005.
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NEXT GENERATION ALTERNATIVE INVESTING
especially in public funds’ real estate (ex-REITs)
portfolios (Exhibit 72).
n Infrastructure participation among public funds is
expected to more than double by 2010 (Exhibit 68),
potentially reflecting a comfort with, and a need todiversify large real estate holdings.
n Green/sustainable investing showed unexpected
strength among public funds, with a participation
rate expected to nearly triple by 2010 (Exhibit 68).
We believe that this increase is being driven in part
by various state treasurers, state and city controllers
and other pension leaders in their efforts to channel
more funding toward green investing.3 Several
respondents noted the importance of balancing both
social and fiduciary responsibilities in pursuing
these investments.
n Special issues: GASB accounting for Other Post-
employment Benefits (OPEB) is in transition,
requiring disclosure of the funded status of OPEB
plans, historically funded on a pay-as-you-go basis.
At the time of our survey, there was a great deal of
uncertainty around whether and to what extent
these benefits should be pre-funded, as well as how
to invest any assets set aside for funding. It remains
to be seen how extensive a role alternatives will play
in the investment of these funds (Exhibit 73).
Based on public fund respondents currently investing in the specified assetclass. Respondent base is in parenthesis.
Exhibit 71: Percentage of public fund respondents currentlyinvesting in and planning to increase (decrease) allocations to…
Absolute return/hedge funds
(20)
Private equity(32)
Real estate(39)
60
75
44
6 100
Plan to increase Plan to decrease% of respondents
Percents represent the difference in the average percentage of the real estate(or REIT) portfolio allocated to the specified region in 2010 minus the averageallocation in 2007. For respondents currently or planning to invest in real estateand/or REITs. Respondent base is in parenthesis.
Exhibit 72: Public funds expect further geographic diversificationof their real estate and REIT portfolios
REITsPortfolio (26)
Real estateportfolio (32)
5.1
-11.5
2.9
3.7
3.0
1.9
Global
International
U.S. domesticExpected net change in % of realestate (or REIT) portfolio allocated to…
1. “Do you plan to fund your OPEB (Other Post-employment Benefits) liability?” 2. “At what level?” 3. “And how do/would you construct your OPEB portfolio as compared to your current pension plan?”
Exhibit 73: Will public plan sponsors pre-fund Other Post-employment Benefits (OPEB) liabilities... at what level, and how?
% respondents (50)Level of OPEB Funding:
27% expect to fund the annual required contribution (ARC) only
18% expect to fully fund liabilities
Construction of OPEB Portfolio:
16% expect to construct OPEB portfolios with thesame allocation as their current pension portfolio
8% expect to construct an OPEB portfolio that isless aggressive than their current pension portfolio
Unsure30%
No26%
No answer22%
Yes22%
Yes22%
3 See for example the Investor Network on Climate Risk (INCR) Action Plan, April 2008.
ANALYSIS BY INVESTOR SEGMENT: PUBLIC PENSION FUN
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36 NEXT GENERATION A LTERNATIVE INVESTING
ENDOWMENTS & FOUNDATIONSFor E&F investors, the challenge is to maintain
current payouts while protecting the real value of
assets. With generally less restrictive investment
policies and a longer history with alternatives,E&Fs now have an average allocation to alterna-
tives of 29%, headed toward 36% in 2010
( Exhibit 74 ), approximately double that of public
funds and corporate plans.
In fact, more than half of E&F respondents say that a
20% to 30% allocation to alternatives is “too low”
(Exhibit 75) and approximately a third believe that
there is no natural limit on the extent to which alter-
natives could displace traditional long-only strategies
within the portfolio.
In addition to the highest overall commitment in
terms of portfolio allocation, E&Fs in general, show
the most dynamic approach to alternatives: i.e., the
greatest diversification within alternatives and the
most opportunistic view of the market. For example,
they take an opportunistic view of recent market tur-
moil, with 68% saying that current credit market dis-
locations offer a buying opportunity (Exhibit 76).
More than 50% indicate they have taken advantage of
shorter-term opportunities (or have the ability to do
so) alongside their longer-term strategic investments.
Given their strong internal capabilities, E&Fs rely
primarily on internal investment staff to implement
these opportunistic strategies (Exhibit 77).
Based on their high reliance on alternatives, it is not
surprising that E&Fs are concerned that high inflows
will create overcrowding and impinge not just on
their access to top managers, but also their managers’
access to deal flow and investment opportunity:
n “Falling returns,” “overcrowding,” and “quality
managers” were cited as the top three concerns forE&Fs with regard to alternatives (Exhibit 78).
n In addition to transparency, their top concern
regarding absolute return/hedge funds is access to
top performing managers (Exhibit 79).
% E&F respondents (55)
Too low?
51%
Just right?
38%
Too high?
11%
Exhibit 75: Overall, E&Fs feel an allocation of 20% to 30% toalternatives is too low
“Would you say a 20% to 30% asset allocation to alternatives is...” Asked of allrespondents. Respondent base is in parenthesis.
Exhibit 74: E&Fs have the highest and fastest growing allocationto alternatives
Respondent base is in parenthesis.
51 47
1918
29 36
0%
20%
40%
60%
80%
100%
2007(43)
2010(40)
Total Equity
Average allocationsacross E&F respondents
Fixed Income
Alternatives
Exhibit 76: E&Fs generally view recent changes in the structured products and credit insurance markets as an opportunity
“How do the recent changes in the structured products and credit insurance markets affect your view of alternative investments in your portfolio?” Multiple responsesaccepted. Respondent base is in parenthesis.
Other
We have less confidence in existingmanagers and their ability to generate
superior returns
We are cautiously optimistic aboutcurrent and new investment in
alternative strategies
We are not particularly concernedabout the impact of recent market
events on our portfolio
We think current market conditionsoffer a buying opportunity
% of respondents
14
4
41
30
68
13
3
47
16
81
17
4
35
52
52
Total E&Fs (55)
Endowments (32)
Foundations (23)
ANALYSIS BY INVESTOR SEGMENT: ENDOWMENTS & FOUNDATIONS
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NEXT GENERATION ALTERNATIVE INVESTING
80
89
64
12
7
15
29
21
33
44
36
48
Flexibility to implement shorter-term ideas? Who implements these ideas?
Total E&Fs (41)
Endowments (27)
Foundations (14)
Total E&Fs (53)
Endowments (32)
Foundations (21)
Other
Other good managers whoprovide the insightful ideas
Existing managers
In-houseinvestment staff
5
9
13
Yes, we have flexibility to takeadvantage of shorter-term
opportunities, but have not implemented
48
3222
No, we do not typically investthis way, other than when our
existing managers do so withintheir current mandate
5
6
6Other
43
55
63 Yes, we have taken advantageof shorter-term opportunities
% of E&F respondents
Exhibit 77: E&Fs have taken advantage of shorter-term opportunities alongside their longer-term investment horizon
“Alongside your long-term investment horizon, do you exercise shorter-term investing flexibility to take advantage of current market opportunities?”“If you have implemented shorter-term opportunities, or have the flexibility to do so, who has implemented/is likely to implement these ideas?” Multiple responses accepted. Respondent base is in parenthesis.
46
30
24
19
11
11
4
Transparency
Access to top-performing managers
Resources and expertise
Liquidity
High fee arrangements
Headline risk/reputation risk
Board approval
% of E&F respondents citing…
Exhibit 79: Transparency is the primary challenge E&Fs face when investing in absolute return/hedge funds
“What are the top three challenges you face when considering investments in absolute return or hedge fund strategies?” Respondent base = 54. Multiple responsesaccepted.
% of E&F respondents citing…
22
0
0
2
2
44
4
9
9
9
11
15
20
20
28
Other
Counterparty relationship
Accounting concerns
Global recession
Fees
Blow up/melt downVolatility
Staffing/oversight capabilities
Valuations
No concerns
Risk
Liquidity
Transparency
Quality managers/tools
Overcrowding of space
Falling returns/performance
Exhibit 78: Greatest concerns among E&Fs regarding alternatives and the management of their portfolios
“As alternative investments become more popular, what is your greatest concern with respect to managing your plan assets/portfolio in the current marketenvironment?” Multiple responses accepted. Respondent base = 46.
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38 NEXT GENERATION A LTERNATIVE INVESTING
Growth Highlights
Despite overall high participation rates and high
allocations, E&F investors continue to set the pace by
increasing their exposure to alternatives nearly across-
the-board, in well-established as well as newer alterna-tive categories. Significant trends in the E&F investor
segment include:
n Real estate will be a dynamic asset class for
E&Fs—a somewhat surprising result, given that
this asset class has not been an emphasis for E&Fs
historically, and they have dedicated a relatively
small share of their alternative portfolios to real
estate. On the other hand, this recent attention to
real estate is not so surprising when one takes into
account their opportunistic approach. Over the next
several years, real estate is expected to show:– a large jump in new investors (13% of E&F
respondents) with E&Fs’ participation rate reach-
ing 92% by 2010 (Exhibit 80)—nearly equaling
the participation rate of public funds
– allocation increases (+26% among current inves-
tors; and +38% across all E&F respondents) that
are the largest of any investor group
(Exhibits 81, 82)
– a majority of existing E&F investors (60%)increasing their allocations (Exhibit 83)—the
highest percentage of any investor group
– growth in large part focused on non-U.S. assets,
with a declining share of real estate and REIT
portfolios allocated to the United States
(Exhibit 84)
n Private equity has nearly a 100% participation
rate among E&Fs (Exhibit 80). Nevertheless it is
projected to be the fastest growing major alterna-
tive asset class for E&Fs over the next three years,with a surprisingly large increase in overall portfo-
lio allocation: +42% across current private equity
investors as well as across all E&F respondents
(Exhibits 81, 82).
Respondent base is in parenthesis.
Exhibit 80: Participation rates—percentage of E&F respondents currently investing or planning to invest in…
Absolute return/hedge funds
(53)
Privateequity(54)
Real estate(53)
Infrastructure(29)
Otherreal assets
(51)
Portablealpha(47)
Net long equity(130/30)
(49)
Green,sustainable
(33)
2128 30
0 4 3
7579
27
9398
% of respondents
138
1566
Currently invest Plan to invest
Based on respondents currently investing in the specified asset class.Respondent base is in parenthesis.
Exhibit 81: Average allocations across E&F respondents currentlyinvesting in…
Absolute return/hedge funds
(37) (35)
Private equity(35) (33)
Real estate(29) (27)
5.47.4
15.6
10.5
6.8
18.1
2007 2010 Average allocations (%)
Average allocations are calculated across all E&F respondents—includinginvestors and non-investors in the specified asset class. Respondent base is inparenthesis.
Exhibit 82: Average allocations across all E&F respondents for…
Absolute return/hedge funds
(40) (40)
Average allocations (%)
Private equity(40) (38)
Real estate(40) (38)
3.9
6.4
14.1
9.1
5.4
16.3
2007 2010
ANALYSIS BY INVESTOR SEGMENT: ENDOWMENTS & FOUNDATIONS
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NEXT GENERATION ALTERNATIVE INVESTING
In addition, E&Fs are taking a much more aggres-
sive posture with respect to geographic diversifica-
tion: They are much more likely to invest in Asia/
Pacific, emerging markets, and even global strate-
gies than other investor segments (Exhibit 85).
n Absolute return/hedge fund strategies are
expected to see continued growth, even though
the participation rate among E&Fs is 98%
(Exhibit 80), and these strategies already represent
nearly half of E&F’s alternative portfolio dollar allo-
cations. Overall portfolio allocations are expected to
increase a healthy 16% by 2010—across both exist-
ing investors and all E&F respondents
(Exhibits 81, 82).
n Infrastructure participation among E&Fs stands at
21% (Exhibit 80)—approximately double that ofcorporate and public pension plans. But their inter-
est is slowing somewhat, with relatively few new
investors planning to add this asset class in the near
term.
n Portable alpha should see a steady increase in
usage among E&Fs—increasing by approximately
50% by 2010—as these investors seek to further
diversify their alpha sources (Exhibit 80).
n Other real assets, valued by these investors fortheir diversification and inflation-hedging benefits,
are another area where E&Fs lead. Their participa-
tion in this asset class is expected to rise to more
than 80% by 2010, with a relatively large portion
of non-investors (approximately 30%) adding this
asset class (Exhibit 80). In addition, a large per-
centage of existing investors plan to increase
allocations.
n Green/sustainable investing is yet another area
where E&Fs played the role of “first movers”—with
a participation rate (27%) that is more than double
public funds and triple corporate plans (Exhibit
80). But it is another area in which E&Fs appear to
be taking a breather, with few non-investors look-
ing to add this asset class.
Based on E&F respondents currently investing in the specified asset class.Respondent base is in parenthesis.
Exhibit 83: Percentage of E&F respondents currently investing inand planning to increase (decrease) allocations to…
Absolute return/hedge funds
(50)
Private equity(46)
Real estate(40)
54
84
8
6061
Plan to increase Plan to decrease% of respondents
Percents represent the difference in the average percentage of the real estate(or REIT) portfolio allocated to the specified region in 2010 minus the averageallocation in 2007. For respondents currently or planning to invest in real estateand/or REITs. Respondent base is in parenthesis.
Exhibit 84: E&Fs expect further geographic diversification of theirreal estate and REIT portfolios
REITs portfolio (16)
Real estate,portfolio (29)
-14.6
-8.3
11.1
9.0
10.6
1.8
Expected net change in % of realestate (or REIT) portfolio allocated to…
Global
International
U.S. domestic
Respondent base is in parenthesis.
Exhibit 85: Percent currently investing or planning to invest inprivate equity in...
25
31
15
19
13
18
5
8
5042
40 211
8
4
8
23
2
43
8
40
6
4
50
17
35
21
Europe
Asia/Pacific
Internationaldeveloped
Global
Emerging markets
Corporateplans (48)
Publicfunds (38)
E&Fs (52)
Curre nt ly i nvesti ng P la nning to
“[We are] looking for alpha and taking
advantage of global opportunities and
growth [in real estate].”— Foundation
ANALYSIS BY INVESTOR SEGMENT: ENDOWMENTS & FOUNDATIO
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40 NEXT GENERATION A LTERNATIVE INVESTING
CONCLUSION
It appears that the anticipated risk-adjusted
returns, diversification benefits, and highsatisfaction rates with alternatives will continue
to support their growth across the board—in
all investor segments and alternative asset
classes—outweighing investors’ concerns
about overcrowding and its potential impact
on performance.
Market dislocations have not dissuaded institutions
from their program of using alternatives to add
sources of uncorrelated return and improve risk-
adjusted portfolio performance. In fact, many investorssee niches of opportunity and are adjusting their alter-
native asset strategies accordingly. What they are not
doing in any substantial way is pulling back.
This survey indicates that alternatives, used in the
right way, are enabling investors to better tailor
investment strategies to address their myriad financial
and investment concerns—e.g., controlling volatility,
boosting returns, or hedging inflation.
In this regard, “alternative” assets have indeed become
an essential part of the portfolio, and the survey data
suggest that as investors’ comfort levels rise, so dotheir overall alternative allocations as well as their
diversification within alternative asset classes.
Continuous innovation will be required to meet the
needs—and appetites—of institutional investors as
they further integrate these strategies. They will
require an expanding menu of high-quality, uncorre-
lated alpha sources from markets around the world.
No doubt, just as our current survey includes strate-
gies (e.g., equity 130/30, infrastructure, green invest-ing) not incorporated in our earlier surveys, we expect
our future research on investment trends to cover
strategies, structures, investment themes and frame-
works now only on the drawing board or perhaps not
yet conceived.
For asset managers, this growth will pose a challenge.
Investors will demand an increase in the availability
and diversification of alternative offerings—challeng-
ing managers to maintain quality and performance
standards even while significantly increasing capacity.
Some are likely to demand packaging and programsthat simplify access, portfolio construction, risk man-
agement, and due diligence. Others will look to form
strategic partnerships with their asset managers to tap
into best ideas and develop unique, customized solu-
tions for their investment challenges. They are also
likely to require more assistance in educating them-
selves and their boards, and in effectively incorporat-
ing alternatives into their portfolio strategies.
Thus far the industry has proven itself up to the task,
with continuous innovation in nearly every aspect of
alternative investing. Over the next several years,however, asset managers will distinguish themselves
by delivering the highest levels of thought leadership
and client service that ultimately serve to meet or
exceed clients’ performance expectations for both risk
and return.
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NEXT GENERATION ALTERNATIVE INVESTING
ABB Incorporated
Abbott Laboratories
Air Products and Chemicals, Incorporated
Alliant Techsystems Incorporated
American Airlines, Incorporated
American Electric Power Company, Incorporated
American Red Cross
Ashland, Incorporated
Avaya Incorporated
B&W Technical Services Y12, L.L.C.
Baltimore County Employees’ Retirement System
Battelle Memorial Institute
Baylor College of Medicine
Baylor Health Care System
Baylor University
Boise Cascade, L.L.C.
BP North America Incorporated
Briggs & Stratton Corporation
Carnegie Mellon University
Casey Family Programs
Charles Stewart Mott Foundation
Citizens Communications Company
City of Birmingham Retirement and Relief System
City of Hartford Municipal Employees’ Retirement Fund
City of Los Angeles Fire and Police Pension System
City of Memphis Retirement System
City of Miami Fire Fighters’ and Police Officers’Retirement Trust
Colgate-Palmolive Company
Conrad N. Hilton Foundation
Consolidated Edison Company of New York, Incorporated
Corning Incorporated
Cox Enterprises, Incorporated
Cummins Incorporated
Dana Corporation
Daniels Fund
Denver Employees Retirement Plan
Deseret Mutual Benefit Administrators
Directors Guild of America
District of Columbia Retirement Board
DTE Energy Company
Duke Energy Corporation
Duke University
Eastman Chemical Company
Eaton Corporation
El Paso Corporation
Emory University
Energy Future Holdings Corporation (formerly TXUCorporation)
Evanston Northwestern Healthcare
Ewing Marion Kauffman Foundation
Florida State University Foundation, Incorporated
Ford Motor Company
FPL Group, Incorporated
Geisinger Health System
GenCorp
Georgia-Pacific LLCGreater Kansas City Community Foundation
Grinnell College
GuideStone Financial Resources of the SouthernBaptist Convention
Houston Police Officers’ Pension System
Indiana State Teachers’ Retirement Fund
Inter-American Development Bank
PARTIAL LISTOF PARTICIPANTS
JPMorgan Asset Management wishes to thank all 191 institutions who participatedin our survey. The following participating institutions generously agreed to havetheir names listed in this report.
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42 NEXT GENERATION A LTERNATIVE INVESTING
International Brotherhood of Electrical WorkersLocal 26
Jacksonville Police and Fire Pension Fund
John Hancock Financial Services Incorporated
Johnson Controls, Incorporated
Lehigh University
Lifespan Corporation
Lockheed Martin Corporation
Los Angeles City Employees’ Retirement System
Los Angeles County Employees Retirement Association
Louisiana School Employees’ Retirement System
Lumina Foundation for Education
Maine State Retirement System
Meadows Foundation, Incorporated
Michelin North America, Incorporated
Michigan Catholic Conference
Minnesota State Board of Investment
New Mexico Educational Retirement Board
New York-Presbyterian Fund, Incorporated
North Dakota State Land Department
Novartis Corporation
NSTAR
Ohio State University
Oklahoma Firefighters Pension and Retirement System
Omaha School Employees’ Retirement System
Pennsylvania Municipal Retirement System
PPG Industries, Incorporated
PPL Corporation
Public Employees Retirement Association ofNew Mexico
Public Employees’ Retirement System of Mississippi
Public School & Education Employee RetirementSystems of Missouri
Public School Teachers’ Pension & Retirement Fundof Chicago
Sacramento County Employees’ Retirement System
San Antonio Fire & Police Pension Fund
San Joaquin County Employees’ Retirement Association
School Employees Retirement System of Ohio
Sempra Energy
Shelby County Retirement System
Shell Oil Company
Smith College
Smithsonian Institution
South Carolina Retirement Systems
Southern California Edison Company
Southern Ute Indian Tribe
Tallahassee Employees’ Retirement Fund
Texas A&M Foundation
Texas Scottish Rite Hospital for Children
The Aerospace Corporation
The Harry and Jeanette Weinberg Foundation, Incorporated
The J. Paul Getty Trust
The McGraw-Hill Companies
The McKnight Foundation
The Nature Conservancy
The Ohio Police & Fire Pension Fund
The Rotary Foundation of Rotary International
The Samuel Roberts Noble Foundation, Incorporated
The UCLA Foundation
Tulare County Employees’ Retirement Association
UNITE HERE National Retirement Fund
United Farm Workers Juan De La Cruz Pension Plan
United Food & Commercial Workers Union - Pension Fund,Atlanta
United Food and Commercial Workers Union Local 711
University of Alabama
University of Arkansas Foundation
University of California
University of Chicago
University of Delaware
University of Florida Foundation, Incorporated
University of Rochester
Virginia Retirement System
Washington Mutual, Incorporated
Wyoming Permanent Funds
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IMPORTANT DISCLAIMER
This document is intended solely to report on various investment views held by JPMorgan Asset Management. Opinions, estimates, forecasts, and statements offinancial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information
provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpretedas, recommendations.
This material contains certain projections and assumptions with regard to the opportunities described therein. This material must not be relied upon as advice orinterpreted as a recommendation by JPMorgan Asset Management that the opportunities are a suitable investment for any recipient of this information.
Investors may experience results that differ materially from any information shown. The return on the opportunities will depend on the actual investments madeand the economic, interest rate and regulatory environment during the relevant period.
Infrastructure investments may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economicconditions, changes in the value of the underlying property owned by the trust and defaults by borrowers.
The risk of investing in foreign countries is heightened when investing in emerging markets. In addition, the small size of securities markets and the low tradingvolume may lead to a lack of liquidity, which leads to increased volatility. Also, emerging markets may not provide adequate legal protection for private or foreigninvestment or private property.
Please note that investments in offshore markets are subject to special currency, political, and economic risks. Exchange rates may cause the value of under-lying overseas investments to go down or up. Investments in certain markets may be more volatile than other markets and the risk to your capital is therefore
greater. Also, the economic and political situations may be more volatile than in established economies and these may adversely influence the value of theinvestments made.
JPMorgan Asset Management does not make any express or implied representation or warranty as to the accuracy or completeness of the information containedherein, and expressly disclaims any and all liability that may be based upon or relate to such information, or any errors therein or omissions there from. Thismaterial must not be relied upon by you in making a decision as to whether to invest in the opportunities described herein. Prospective investors should conducttheir own investigation and analysis (including, without limitation, their consideration and review of the analyses referred to herein) and make an assessment ofthe opportunity independently and without reliance on this material or JPMorgan Asset Management.
In addition, prospective investors are strongly urged to consult their own legal counsel and financial, accounting, regulatory and tax advisers regarding theimplications for them of investing in these opportunities.
JPMorgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limitedto, J.P. Morgan Investment Management Inc., JPMorgan Investment Advisors Inc., Security Capital Research & Management Incorporated and J.P. MorganAlternative Asset Management, Inc.
© JPMorgan Chase & Co. July 2008 IMWP_ALT SURVEY
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