Market Pulse: Alternative Assets Survey

Key findings from J.P. Morgan Asset Managements latest poll of institutional investors

Overview
The experiences and lessons of the
recent financial crisis, the most devastating period for market participants in the
post-World War II era, can be expected to
have a lasting impact on the investment
outlook, behavior and strategies of
institutional investors.
J.P. Morgans Market Pulse surveys are designed to capture the
changing perspectives, shifting allocations and developing
portfolio management trends of investors as they continue
their passage out of crisis, into recovery and beyond.
In our latest survey, Market Pulse: Alternative Assets, conducted in March through April of this year, we set out to test the

hypothesis that after an initial pause and re-assessment of

portfolio strategies following the depths of the crisis, investors
are resuming their steady march from the traditional to the
alternative. The results of our research suggest this is indeed
the case.
Our 2010 survey encompasses the views of 349 North American
investors from 325 institutions including corporate plans, public
funds, endowments, foundations and others (see sidebar, overleaf). Through an on-line survey with a specific focus on alternative assets including: hedge funds, private equity, real estate,
infrastructure, commodities and other real assets, we asked
these investors to share with us where they are now, where they
are headed over the next 12 months and what their strategic
investment objectives are over a two to three year horizon.
Survey results confirm that overall, investors are carving out a
broader role for alternatives while trimming back traditional
long-only equity allocations.

Alternative Assets Survey

Nowhere is this trend toward alternatives more pronounced

than among public pension plans, where alternative allocations are set to increase from 14% to 21% of assets over the
next two to three years.
The endowment model appears alive and well. Alternatives
continue to dominate the portfolios of larger E&Fs (with
$1 billion or more in assets) while allocations among smaller
E&Fs (under $1 billion) are well above those of corporate and
public plans of similar size, and growing at a healthy pace.
Corporate plans, driven by the need to control the volatility
of funded status while enhancing returns, are increasing
fixed income allocations (and their duration) and expanding
alternatives (though at a slower rate than their public fund
counterparts).
In addition to these broad findings across investor types, on
the strategy level we find:
Over the next three to five years, Asia/Pacific is viewed as the
region of greatest opportunity for alternative investments;
private equity and infrastructure allocations to the region are
expected to see notable growth, albeit from a small base.
While liquidity is a primary concern, it has also created
opportunity; among those investing or planning to invest in
private equity, almost 40% have invested or intend to invest
in the secondary market.

as a separate asset class but rather as a less constrained,

more actively managed and less liquid extension of their
traditional debt and equity allocations.
Of course, different types of institutions vary in their specific
investment objectives, regulatory constraints and challenges
in ways that shape their investment behaviors. And to be sure,
the experiences of the past few years have brought a sharper
focus on transparency, fees, lock-ups and other liquidity-related
issues often associated with alternative investing. But market
dynamics have also shown that volatility and turmoil can offer
opportunities for alpha generation in the hands of skilled, less
constrained managers. Whats more, the financial crisis has
emphasized the importance of diversification, inflation protection and managing down-side risk while striving to maximize
returns over the long run. Our results suggest that investors
understand and value alternatives for their potential to
address these risk and return objectives.
To varying degrees and in different ways, corporate and public
plans, endowments, foundations and other institutions are
continuing to evolve in their use of alternatives, expanding
into new markets and strategies, adopting new perspectives
and, in the process, defining an increasingly important role for
alternative strategies in their portfolios.
This report provides the key findings of our survey. A more
detailed analysis will be made available later this summer.

Investors are adopting a more risk factor-based view of

hedge funds within the portfolio contexttreating them, not

R e s e a rc h Method ology
Our on-line survey was completed by 349 respondents from a universe of approximately 3,000 North American institutional investors,
including clients and prospects of J.P. Morgan Asset Management, across all client segments.
Respondent profile by type of institution
Other 12%

$10 billion +
11%

Taft Hartley 3%

Endowment/
Foundation
23%

Respondent profile by Size (Assets under management

as of 12/31/09)

Corporate 43%

$1 billion to <$10 billion

44%

Less than $1 billion

45%

Public Fund 18%

Q: Please indicate your type of institution.

Components may not sum to 100% due to rounding.

2 | Market Pulse: Alternative Assets SurveyKey Findings

Q: Please indicate your investment portfolios AUM as of 12/31/09.

Key Findings

Exhibit 1: Overall, an improving outlook for alternatives

over the next 12 months
Improving

Market Outlook: What a Difference a

Year Makes
Our survey was conducted in MarchApril 2010, when equity
markets had rebounded, credit spreads had tightened considerably from their wides, and real estate was poised to rebound.
On most fronts, the world was a lot brighter than at the time of
our last Market Pulse survey in AprilMay, 2009.1 Admittedly,
recent developments in Greece and other eurozone economies,
disappointing U.S. employment results and May/June market
declines have since shaken investors confidence to some
degree but, at the time of our 2010 survey, respondents:
Anticipated a rising rate environment (72% expected
increasing yields over the next 12 months)
Had positive expectations for equity returns (60% expected
an increase over one year, building to 70% over a five year
horizon)
Believed the outlook across most alternatives would
improve in the ensuing 12 months, with the most positive
outlook for private equity (Exhibit 1)
Saw the greatest opportunities over the intermediate term
in real estate and hedge funds (Exhibit 2)
Viewed Asia/Pacific as the geographic region of greatest
opportunity for alternatives over the next three to five years
(Exhibit 3)
Results for real estate revealed some uncertainty about the
timing of a rebound. As seen in Exhibit 1, twenty-five percent
of respondents thought the outlook for real estate would get
worse over the coming 12 months. Further, when asked explicitly about the timing of a real estate turnaround, over half
(55%) saw 2011 as the turnaround year, while 10% anticipated
a rebound in 2010, 18% in 2012 and 13% in 2013 or later
(the remainder did not provide a specific time frame). However,
as seen above, when investors were asked to choose the alternative with the greatest investment opportunities three to five
years out, real estate was a top choice (Exhibit 2).

Market Pulse: Equity Views Survey, April-May 2009, J.P. Morgan

Asset Management.

Worsening

No change

56

Hedge Funds

13
62

Private Equity

12

52

Real Estate

10

Other
Real Assets

14

44
0

20

22
46

53

Commodities

26

25

44

Infrastructure

32

32
48

40
60
% of respondents

80

100

Q: What is your investment outlook for the following alternative asset classes
over the next 12 months?
Base = 349 respondents

Exhibit 2: Greatest investment opportunities over the next

3 to 5 years
Other Real Assets
6%
Commodities
16%

Hedge Funds
24%

Infrastructure
9%
Private Equity
21%

Real Estate
24%

Q: Of the following alternatives, which do you feel offers the greatest

investment opportunity over the intermediate investment term? (i.e., 3 to 5
years... check only 1)
Base = 349 respondents

EXHIBIT 3: Investors are bullish on Asia/Pacific for

alternative investments
Other
5%

Asia/Pacific
56%

North America
37%

Europe
3%

Q: Which of the following geographic regions do you feel offers the greatest
opportunity for alternative investments over the intermediate investment term
(i.e., 3 to 5 years)? (Check one)
Base = 349
Components may not sum to 100% due to rounding.

J.P. Morgan Asset Management | 3

Alternative Assets Survey

Allocations: Back on Track from Traditional

to Alternative
Our broad asset allocation results suggest to us a shift in posture on the part of investors with respect to portfolio allocations
since the months shortly after the peak of the financial crisis.
We conducted our first Market Pulse survey in AprilMay 2009,
just after the S&P 500 hit its March lows following a decline of
57% from its October 2007 peak. We found investors cautiously
rebuilding their equity portfolios back toward pre-crisis targets, with little change in alternatives looking 12 months out
(Exhibit 4, left side).
In contrast, broad asset allocation results from our recent
2010 survey (Exhibit 4, right side) indicate an increase from
16% year-end 2009 actual alternative allocations to a strategic
target of 20% over the next two to three yearsan increase
funded primarily by a decline in equity allocations.

Exhibit 4: After a pause for reassessment, investors are again

shifting toward alternatives
Fixed income

Market PulseSpring 2009 Survey

Percent

100
90
80
70
60
50
40
30
20
10
0

3
12
31

5
13

35

3
13
33

Exhibit 5: The majority of investors are increasing or

maintaining total alternative allocations

Cash

28

Market PulseSpring 2010 Survey

3
16
35

18

20

35

35

26
24
22
20
18
16
14
12

54

Actual 2009
allocation

Target 2010
allocation

Strategic
(23 years)
allocation

56% of respondents
Increasing

14.6

19.3

23.3

31% of respondents
Maintaining

14.3

14.2

14.3

13% of respondents
Decreasing

24.8

23.7

23.7

51
47

Original
2008 Target

Alternatives

How pervasive is this increasing reliance on alternatives? In

addition to overall shifts in average allocations, our analysis
looked at the number of investors increasing, decreasing and
maintaining total alternative allocations (comparing year-end
2009 to strategic levels two to three years out) and found that
the majority (56%) have set strategic allocations above actual
2009 levels while 31% planned to maintain 2009 allocations.
Only 13% were planning to decrease alternatives shareand
these investors already had relatively large average allocations to alternatives (24.8%) (Exhibit 5).

Alternative allocation (%)

Equities

We have observed a shift toward alternatives and away from

traditional assets (among pension plans) in our survey
research since 2006.2,3 We see in our latest results evidence
that investors are back on this track, following a crisis-induced
period of re-evaluation.

Actual
2008

46

12month
Target

Actual
2009

45

Target
2010

43
Strategic
(23 years)

Q (2009 Survey): Please indicate your asset allocation as of 12/31/08 as well as

your original target weight at that time. Please also indicate what your target
allocation is for 12 months from now.
Q (2010 Survey): Please indicate your current asset allocation (as of 12/31/09),
your target asset allocation (12/31/10) as well as your strategic asset allocation
(23 years out).
Base (2009 Survey): 272 Total; Corporate 147; Public 52; E&F 35, Taft-Hartley/
Other 38
Base (2010 Survey): 306 Total; Corporate 138; Public 56; E&F 65; Taft-Hartley/
Other 47

Base = 306 respondents

Source: J.P. Morgan surveys: Market PulseEquity Views Survey, 2009;

Market PulseAlternative Assets Survey, 2010.

4 | Market Pulse: Alternative Assets SurveyKey Findings

Pension Investment Strategies for a New Playing Field: J.P. Morgans survey of
major U.S. pension plans, JuneJuly, 2006.

Next Generation Alternative Investing: J.P. Morgans survey of major U.S.

institutional investors, First Quarter, 2008.

How Alternatives Stack Up

Exhibit 7: Modest increases expected across alternative

categories
Hedge Funds
Infrastructure

25

Private Equity
Commodities

Real Estate
Other Real Assets
20.2

20

18.2
15.8

Percent

The advantages of the most established categories of

alternatives are by now well known among institutional
investors: return enhancement, diversification and, in the case
of real estate, inflation protection. However, as with most asset
classes, the recent financial crisis served to underline their
disadvantagese.g., less liquidity and transparency and higher
fees than traditional long-only strategies (Exhibit 6). Yet, our
results suggest that on balance, given recent experiences and
lessons learned, investors have maintained their faith in
alternatives and overall, are expanding allocations to these
strategies, seeking greater diversification and a more optimal
alpha/beta mix. Hedge funds, private equity and real estate
alike are expected to participate in the growth of alternative
allocations over the next two to three years. At the same time,
infrastructure, commodities and other real assets, currently
representing a small portion of alternative portfolios overall,
are expected to attract new investors (Exhibits 7, 8 and 9).

15
10

4.5

4.9

5.6

6.4

6.8

Actual
2009

Target
2010

Strategic
(23 years)

4.0
5
0

4.9

4.5

3.9

Base = 306 respondents

Exhibit 8: Percentage of respondents currently investing and

planning to invest in...
% investing

% planning to

Percent

Exhibit 6: AlternativesGreatest advantages and disadvantages

46

61

52

10

16

17

Private
Equity

Real
Estate

Greatest
Disadvantages
Fees 70%
Transparency 68%
Liquidity 67%

Greatest
Deterrents
Transparency 59%
Fees 44%
Volatility of
returns 28%

Base = 306 respondents

Returns 94%
Liquidity 85%
Diversification
Fees 68%
68%
Transparency 27%
Top manager access
42%

Liquidity 62%
Transparency 43%
Fees 30%

Exhibit 9: Average allocations for those currently

investing in

Diversification
Liquidity 79%
81%
Fees 48%
Inflation protection Leverage 34%
65%
Returns 63%

Liquidity 66%
Returns 29%
Internal resources
25%

9
Hedge
Funds

Private
Equity

13.6

Real
Estate

Infrastructure Commodities

Other
Real Assets

Strategic (23 years)

Actual 2009

12.3

Base = Hedge funds: Investing/planning to invest 191, Not planning to 158;

Private Equity: Investing/planning to 211, Not planning to 138;
Real Estate: Investing/planning to invest 248, Not planning to 101.
Q: When considering investments in (alternative), what are the top three
advantages/disadvantages [check 3]? (for those investing/planning to)
Q: What are the top three challenges preventing you from investing in
(alternative) [check 3]? (for those not planning to invest)

Percent

Hedge
Funds

Greatest
Advantages
Diversification
73%
Returns 63%
Volatility of returns
51%

7.6

8.5
6.3

7.2
5.7
4.3

6.7 6.8
5.2 5.1

Hedge Funds Private Equity Real Estate Infrastructure Commodities Other Real
(140)
(160)
(188)
(29)
(48)
Assets (51)

Number of investors in parenthesis.

Due to small sample size, some results should be interpreted directionally only.

J.P. Morgan Asset Management | 5

Alternative Assets Survey

Hedge funds

Private equity

While hedge funds are a less seasoned component of

institutional portfolios with somewhat lower participation rates
than private equity or real estate (Exhibit 8), they have the
largest average allocations, with current investors putting, on
average, 12% of portfolio assets into this alternative asset
category (Exhibit 9). Across all respondents (investors and noninvestors), average allocations are expected to increase from
5.6% to 6.8% (Exhibit 7). As shown in the Peer Perspectives
section below, while endowments and foundations dominate
this space, public funds, which currently have the smallest
hedge fund allocations and lowest participation rate, are
expected to have the fastest rate of growth in hedge funds
across institutional segments.

More than any major alternative category, private equity is

valued first and foremost for return generation. Participation
rates are higher than for hedge funds and lower than for real
estate, while the reverse is true for average allocations among
current investors (lower than for hedge funds, higher than for
real estate, Exhibits 8 and 9). Across all investors, allocations
are expected to increase from 4.0% to 4.9% (Exhibit 7). This is
another alternative category where E&Fs dominate, but where
public funds anticipate significant increases in allocation and
participation rates.

Given that hedge funds are essentially the ultimate expression

of active management within the spectrum of equity and credit
strategies, there has been much discussion about how they
should be categorized within institutional portfolios: along with
the appropriate traditional asset category, or as a stand-alone
hedge fund or absolute return allocation. Our results show
that various approaches are being used, with a stand-alone
hedge fund allocation still most common, but with equity/fixed
income categorization gaining ground, particularly among
larger firms (Exhibit 10).

Exhibit 10: Investors are beginning to categorize hedge funds

as part of equity and fixed income allocations
All respondents

Less than $1 billion

By risk factor/traditional
asset categories
(e.g. Equity/Fixed Income)

$1 billion to <$10 billion

26

$10 billion +

37
38

10

20
30
40
% of respondents

26

Corporate

25

42
43
50

50

13

11

32

Public Fund

50

56

17

25

32

13
20

11

19

52
40

60

10
80

100

Q: Have you purchased any private equity on the secondary market in the last
12 months?
Base = Those investing or planning to invest in private equity: Total 211,
Corporate 84, Public funds 41, Endowments and foundations 61, Taft Hartley/
Other 25

60

Q: How do you categorize your hedge fund allocation? (check all that apply)
Base = Less than $1 billion 77, $1 billion to < $10 billion 90, $10 billion+ 24
Due to small sample size, some results should be interpreted directionally only.

6 | Market Pulse: Alternative Assets SurveyKey Findings

All
Respondents

No, but I plan to purchase in the next 12 months

Not sure

Percent

6
5
7
8

Other

Yes, I've purchased

No, and I have no plans to purchase

0
52
53
52

46

39

Exhibit 11: Percentage of private equity investors who have

purchased or are planning to purchase private equity
interests on the secondary market

Endowment/
Foundation

32

As a stand-alone
Hedge Fund allocation

Absolute return

While liquidity has been an acute concern for private equity

investors through the recent market turmoil, the need for
liquidity has generated attractive investment opportunities.
This is evidenced by the 39% of investors who reported having
purchased private equity interests on the secondary market in
the past 12 months (26%) or those planning to do so over the
next 12 months (13%) (Exhibit 11).

Investors also see private equity as a way to benefit from the

Asia growth story. While Asia/Pacific accounts for only 10% of
current private equity portfolio allocations, that share is expected to increase to 15% over the next 12 months (Exhibit 12).
Exhibit 12: Investors perceive opportunity in Asia/Pacific
private equity
80
70

Current allocation (%)

12month target (%)

70
64

60
Percent

50
40
30
16

20

18
10

10

15
3

0
North America

Europe

Asia/Pacific

Other

Q: Please indicate the percentage of your private equity portfolio you currently
invest and plan to invest over the next 12 months, in the following geographic
areas (Total = 100%).
Base: Current allocations 168, Planned allocations 134
Components may not sum to 100% due to rounding.

These real opportunities (infrastructure, commodities and

other real assets) represent only a thin slice in the portfolios
of our survey participants, accounting for 2.4% of average
portfolio allocations today, and targeted to increase to 3.6%
over the next two to three years. Participation rates are
expected to rise, particularly for infrastructure and commodities. Additionally, among the 17% of respondents currently
investing in other real assets, average allocation levels are
comparable to those for real estate (Exhibits 8 and 9).
Infrastructure to-date, appears to have the greatest appeal
for public funds, with 18% currently investing and 20% planning to. Perhaps this is a result of infrastructures real estatelike diversification, inflation-protection and income-producing
characteristics and the social and economic (in addition to
investment) benefits that states and municipalities derive from
investing in infrastructure.
Our survey indicates that, as in the case of private equity,
investors see infrastructure as another way to access growth
opportunities in the Asia/Pacific region (Exhibit 13).
Exhibit 13: Allocations to Asia/Pacific infrastructure are
expected to increase

Real assets: Real estate

Public funds are expected to be the drivers of this allocation

shift, since (based on our detailed analysis) almost all public
funds (89%) invest in real estate; their average allocations are
greater than those of corporate plans or E&Fs and they have
the largest gap between current and strategic allocations
(see Exhibit 16, page 9).

Real assets: Infrastructure, commodities and other

Real assets, broadly defined to include not only real estate,
but also infrastructure, commodities and other real assets
(maritime investments, oil and gas, timber, water rights and
other private partnerships), can provide investors with
opportunities to further enhance returns, diversify portfolio
assets and manage the impact of inflation on asset values.

70
60

12month Target (%)

68
62

50
Percent

Real estate has an important role in institutional portfolios

as a diversifier, source of returns and an inflation hedge
(an increasing concern for investors, given budget deficits
resulting from accommodative fiscal and monetary policy in
response to the financial crisis). A greater percentage of
investors participate in real estate than in any other alternative
category (Exhibit 8). With current allocations (3.9%) below
strategic targets (4.9%), growth is anticipated (Exhibit 7).

Current allocation (%)

80

40
30

24

24

20

12
6

10

0
North America

Europe

Asia/Pacific

Other

Q: Please indicate the percentage of your infrastructure portfolio you currently

invest and plan to invest (12 month target) in the following geographic areas
(Total = 100%).
Base: Current allocation 36, Planned allocation 42
Due to small sample size, results should be interpreted directionally only.

Commodities and other real assets are (as seen in the Peer
Perspectives section below) a clear area of interest for
endowments and foundations. Once again, these institutions
appear to be leading the way as they search for new sources
of alpha, uncorrelated returns, and to preserve the real value
of their assets.

J.P. Morgan Asset Management | 7

Alternative Assets Survey

Peer Perspectives
The steady growth trend in alternatives and the decline in more
traditional assets is apparent, not only in aggregate, but within
specific investor segmentsacross corporate plans, public
funds, endowments and foundations. But these broad allocation
shifts, as well as the composition of alternative portfolios, are
nuanced by the primary objectives and specific challenges
faced by each distinct investor type (Exhibits 14, 15 and 16).

Our findings suggest that the anticipated responses of

corporate plans to this two-pronged challenge include steps
designed to better match the sensitivity of assets and
liabilities to changes in discount rates (e.g., increasing fixed
income allocations and extending duration) and to increase
diversification and enhance returns (e.g., increasing
allocations to alternatives such as hedge funds, while
decreasing traditional equity allocations) (Exhibits 15 and 16).

Public funds

Corporate plans
Our survey results confirm that the primary objective for
corporate plans in managing pension assets is asset/liability
management (followed by return generation)with the
greatest challenges revolving around funded status and
liquidity concerns (Exhibit 14).
These objectives and challenges are driven largely by the need
to meet pension benefit obligations in the long run, while
adapting to progressively more stringent funding and
accounting regulations (under the 2006 Pension Protection
Act, SFAS 158 and FSP SFAS 132(R)-a), for example) which
have short-term implications for managing portfolio assets.
These rules and regulations have increased funding targets,
imposed more market-based valuation of assets and liabilities
and essentially recognized pension-funded status on corporate
balance sheetsall of which has heightened the need for
pension plan CIOs to more carefully manage the volatility of
funded status and contributions.

Generating returns is the primary objective for public plans;

doing so while effectively managing portfolio risk is their
greatest challenge. In terms of managing alternative assets,
selecting top managers and the resources required for effective
due diligence, together with liquidity are principal concerns.
One of the surveys clearest indications is that public funds are
aggressively embracing the use of alternatives in addressing
these risk and return challenges. Over a two-to-three year
horizon, these investors are expecting to shift from portfolios
with over 85% in traditional assets, to a more alpha-focused
mix with 21% in strategic allocations to alternatives, funded by
decreasing allocations to both equity and fixed income. The
percentage of assets allocated to hedge funds and private
equity (currently at or below levels for corporate pension
plans) are expected to grow at significantly faster rates than
for their corporate counterparts. Even real estate, where
public fund allocations are already double those of corporate
plans, is expected to see substantive increases, as are
allocations to other real assets, such as infrastructure.

Exhibit 14: Differences in objectives and challenges shape investment behaviors across institutional segments

Corporate (150, 98, 74)

Asset liability (ALM) 47%
Return generation 31%

Public (63, 50, 37)

Return generation 50%
Volatility management 21%

E&F (81, 56, 50)

Return generation 60%
Volatility management 12%

Greatest challenge: Portfolio assets

Allocation/ALM 20%
Funding status 16%

Risk/return 22%
Return expectations 14%

Return expectations 23%

Liquidity 16%

Greatest challenge: Alternative assets

Liquidity 22%
Allocation 14%

Resources, liquidity, manager selection 14%

Liquidity 28%
Transparency 14%

Primary objective

Respondent base in parenthesis (e.g., 150 corporate plans responded to Q1: What is your primary objective?); Due to small sample size, some results should be
interpreted directionally only.
Q1: What is your primary portfolio objective driving your asset allocation decisions (Check one: Return generation, volatility management, asset liability management,
protection against inflation, preserving liquidity, other).
Open-ended questions
Q2: What is the biggest challenge you face when you think about managing your portfolio assets?
Q3: What is the biggest challenge you face when you think about managing your portfolios alternative asset allocation?

8 | Market Pulse: Alternative Assets SurveyKey Findings

Exhibit 15: The trend toward alternatives is seen across investor segments
Equities
Corporate

Spring 2009
survey
3

10

11

12

14

100
90

Fixed income

Spring 2009
survey
3
15

Cash

Alternatives

Public Fund
2

Spring 2009
survey
3

14

18

21

21

31

30

23

Endowment/Foundation

80
36

Percent

70

40

41

42

60

32

31

26

29

31

23

22

22

47

48

46

2009
Actual

12month
Target

Strategic
23 years

50
40
30
20

51

51

46

45

42

2009
Target

2009
Actual

12month
Target

Strategic
23 years

52

52

50

48

2009
Target

2009
Actual

12month
Target

Strategic
23 years

54

10
0
2009
Target

Q (2009): Please indicate your asset allocation as of 12/31/08 as well as your original target weight at that time. Please also indicate what your target allocation is for
12 months from now.
Q (2010): Please indicate your current asset allocation (as of 12/31/09), your target asset allocation (12/31/10) as well as your strategic asset allocation (23 years out).
Base (2009 Survey): 272 Total; Corporate 147; Public 52; E&F 35, Taft-Hartley/Other 38
Base (2010 Survey): 306 Total; Corporate 138; Public 56; E&F 65; Taft-Hartley/Other 47
Components may not sum to 100% due to rounding. Due to small sample size, some results should be interpreted directionally only.

Exhibit 16: Alternatives stack up differently across investor segments

Hedge Funds

35

Private Equity

Real Estate

Infrastructure

Commodities

Other Real Assets

28.8

30
26.1
25

2.7

Percent

20

18.2

15
10.6
10
2.6

3.4

3.3

20.9

30.7

3.0

12.1

13.6

2.9

3.3

3.3

3.5

3.6

4.3

4.6

Actual
2009

12month
Target

Strategic
23 years

Corporate (138)

13.7
7.5

8.1

5.0

4.7

4.2

6.6

7.2

11.6

12.3

12.6

Actual
2009

12month
Target

Strategic
23 years

6.1

5.8
2.9
2.6
Actual
2009

3.8

4.6

3.7

4.2

12month
Target

Strategic
23 years

Public Fund (56)

Endowment/Foundation (65)

Number of respondents in parenthesis.

J.P. Morgan Asset Management | 9

Alternative Assets Survey

We see this dichotomy between public and corporate pension

plan strategies to be attributable to a number of factors, but
primarily to current differences in funding and accounting
regulations (e.g., less market-oriented valuations of assets and
liabilities, different smoothing specifications, less emphasis on
quarter-to-quarter funded status volatility) which allow public
plans to focus more on the long-term objective of meeting benefit
obligations and somewhat less on short-term volatility concerns.
Further, the Cost of Living Adjustments (COLAs) embedded in
many public pension plans (and less common for corporate
plans) are one consideration likely to be driving larger
allocations to real assets, given their potential inflation
protection benefits.

Endowments and foundations

Endowments and foundations manage their portfolios to maintain current payouts while protecting the real value of assets.
Their primary objectives, like those of public funds, are return
generation and managing volatility. Liquidity is clearly viewed
as a major portfolio management challenge.
With generally fewer investment restrictions than pension
plans, endowments and foundations are able to manage
assets more opportunistically and have traditionally relied on
alternatives, particularly hedge funds, to a much greater
extent than corporate and public pension plans. This more
aggressively diversified portfolio allocation profile reflects the
so-called endowment model, a well-known investment

10 | Market Pulse: Alternative Assets SurveyKey Findings

approach, championed most notably by David Swensen, CIO

at Yale University.4 The model is designed to allow alpha
opportunities to be exploited while diversifying and protecting
portfolios on the downside to enhance returns over the long
term. However, in the course of the recent financial crisis, its
assumptions regarding the trade-off between liquidity and
returns have been brought into question.5
Our survey covers a broad distribution of endowments and
foundations, from small to moderately large plans (69% under
$1 billion and 29% between $1 billion and $10 billion).6 While
in general, their alternative portfolios may not all reflect
endow-ment model proportions, current allocations for E&Fs
in our sample are much larger than for corporate and public
pension plans of comparable asset size. Additionally, they
appear to have embraced other real assets (which we would
define as including private partnerships in oil and gas, timber,
maritime, water rights, etc.) to a greater extent.
Our detailed analysis by size category found that average
allocations to alternatives for larger E&Fs are 44%, increasing
to 46% over the next two to three years. Though their growth
rate is slow, we see little evidence that liquidity issues are
forcing these plans to abandon alternatives. For plans with
under $1 billion in assets, alternatives comprise roughly 18%
of portfolios, on average, and are expected to increase at a
healthy pace, reaching 23% over the next two to three years.

See David Swensen, Pioneering Portfolio Management: An Unconventional

Approach to Institutional Investment, Free Press, 2000.

For more on the endowment model and incorporating liquidity into asset
allocation decisions for E&Fs, see: Defending the Endowment Model
Quantifying liquidity risk in a post-credit crisis world, J.P. Morgan Asset
Management, June 2010.

Asset allocation data were provided by 65 endowments and foundations in

our survey, including 45 E&Fs with under $1 billion in assets, 19 with between
$1 billion and $10 billion, and 1 with $10+ billion. Due to small sample size for
larger institutions, these results should be interpreted directionally only.

Conclusion
The recent financial crisis has clearly shaken the confidence of
investors but in our survey as well as our continuing conversations with clients, we see resiliency, flexibility and an openness
to re-think investment approaches from the inside out. Our
survey results indicate a willingness to re-examine pre-crisis
target allocations and to understand more completely the
alpha, beta and liquidity risk components of their investments.
Investors are beginning to think more holistically about their
portfoliosviewing hedge funds investments, for example, as a
less liquid, unconstrained extension of traditional equity and
fixed income allocations. In their open-ended survey responses we see a desire: to better understand total plan characteristics and risk and the economic sensitivities of individual
investments; to incorporate liquidity into asset allocation
models, and to manage downside or left-tail risks.
These findings indicate to us a renewed commitment to
alternatives as investors continue to fine-tune their strategies
and frameworks for optimizing portfolio risk/return and
liquidity trade-offs. We believe the increasing innovation
within alternatives and the expanding global dimension of

these investment opportunities, as well as industry and

regulatory responses to investors demands for improved
transparency, will lend support to these trends.
We hope this research can offer a valuable perspective to
investors on how others, inside and outside their industry segments, are responding to a challenging and changing investment environment. At the same time, we recognize that each
investor is unique in their needs, objectives and constraints
and we remain committed to partnering with them as they
continue to define the evolving role of alternatives within their
own investment strategies.

Acknowledgement
J.P. Morgan Asset Management would like to thank all 349
investors and the 325 institutions they represent for responding to our survey. Without their participation, this report
would not have been possible.

J.P. Morgan Asset Management | 11

Alternative Assets Survey

Authors

Advisor

Annette Whittemore

Barbara Heubel

Karin Franceries, CFA

Head of Market Research

and Development

Senior Writer
Institutional Marketing

Vice President
Strategic Investment Advisory Group

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