Research Report Tracks Continuing Institutional Shift Into Hedge Funds

Investors Offshore, London

11 November 2002

A new report from Greenwich Associates says that institutional investment in hedge funds and private equity is growing slowly but steadily around the world - with expectations for future use very robust.

Greenwich Associates research with pension funds arfound the world reveals a strikingly large number of institutional investors jumping on the alternative equities bandwagon. In continental Europe, for instance, 31% of funds are using private equity this year - up from just 13% in 2001 - and a further 9% plan to start. In the United Kingdom, 8% of pension funds will start using hedge funds, and in Japan 10% will start doing so.

"We actually saw a higher percentage of funds invest in private equity in 2002 than said they were going to do so the year before, which means they have found the appeal of private equity hard to ignore," says Greenwich Associates consultant William Wechsler.

Among the factors pushing pension funds towards alternative equities, says Greenwich, the most important is of course the abysmal recent performance of traditional equities. Alternative investments not only offer enhanced diversification, but also provide new sources of alpha to pension funds and endowments desperately seeking returns. In addition, hedge funds can be particularly appealing in down markets, because they can take short positions. Private equity has in many instances produced spectacular rewards.

"It will be interesting to see how this appetite for alternatives develops over the coming year," consultant Chris McNickle says.

However, the report underlines some of the possible disadvantages of alternative investments:

• The higher risk and long "lock-up" periods of some alternative investment vehicles may not suit the risk tolerance or the time horizon of some pension plans;
• In today's investment climate, the low number of IPOs and seemingly scant opportunities for venture capital may make prospects for private equity somewhat unpropitious;
• Some of the most successful hedge funds owe their success to their ability to take advantage of "inefficiencies" in the markets - but the recent proliferation of these funds may cause many of these inefficiencies to disappear.

Greenwich Associates (at www.greenwich.com) is the premier international research-based consulting firm in institutional financial services worldwide. Greenwich's studies provide benefits to the buyers and sellers of financial services in the form of benchmark information on best practices and market intelligence on overall trends. Based in Greenwich, Connecticut, with additional offices in London, Sydney, Toronto, and Toyko, the firm offers over 100 research-based consulting programs to more than 250 global financial-services companies.

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