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Institutional Investor Outlook on Alternative Investments

Institutions have been increasing their allocations to alternative investments overall, despite CalPERS (California Public Employees Retirement Systems) divesting from hedge funds. In this environment, managers must be prepared when meeting with potential investors and, furthermore, clearly understand how these fiduciaries use different alternative investments in their portfolios.

At this month’s EisnerAmper breakfast series solely for managers and investors, a quartet of panelists shared their perspectives on what they use alternative investments for in their portfolio, their upcoming allocation plans in the space, and how funds can best present themselves in order to receive inflows.

-Institutional investors allocate to the various types of alternative investments for the specific purpose they serve in their portfolio: hedge funds for downside protection and alpha; private equity and venture capital for enhanced returns; and real estate for diversification. It is imperative managers understand the purpose their strategy will serve in an institution’s portfolio.

-Institutions have been heavily overweight in equities. Therefore, they’re contemplating other investment strategies and types of managers to allocate to, with relative value being one and smaller managers being another. Further, the panelists concur that on the fund of hedge fund (FoHF) side, there is a shift from the traditional FoHF model to a customized FoHF portfolio.

-As institutional investors become bigger, they will shift to more illiquid alternative investments as a way to hedge against inflation.

-The due diligence process institutional investors conduct on alternative investment managers has gotten more complex; demanding more quantitative analysis and the use of risk-based analytics. Therefore, managers must be prepared if they want to increase their chances of receiving an allocation.

-“Burn the books.” Institutional investors do not want managers to present the same pitch book they present to every potential allocator. The investor presentation should be customized for the requirement of the investor they are meeting. Further, their presentation should clearly state the fund’s returns, investment strategy and contact information.

EisnerAmper would like to thank the panelists for their time and insights they shared at the breakfast:

  • Bruce Wilcox, Investment Committee Member, Teachers College, Columbia University Endowment
  • Kristofer Kwait, Managing Director, Head of Hedge Fund Research, Commonfund
  • Gib Dunham, Chief Investment Officer, Carter Burden Center for the Aging
  • Joseph Omansky, Investment Committee Member, Middlesex County Jewish Federation Endowment

Stay tuned for the next breakfast November 18.

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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