The number of government funds seeking alternative investment products has been increasing in the past two weeks. In the past week alone, 10 government institutions have indicated their interest in alternatives. This number is an increase from an average of two to three government mandates per week for the month prior. These institutions not only include U.S. pension plans, but also sovereign wealth funds and international plans based in Europe and other regions. Pension funds in particular seem ready to pounce on new opportunities caused by changes in the alternatives market.
The increase in alternatives mandates shows that government funds are considering that this recently underperforming space might be ripe for recovery and adjustment. China’s sovereign wealth fund’s plan to increase its allocation to hedge funds highlights this trend. According to The Wall Street Journal, the fund chose The Blackstone Group’s hedge fund unit for a $500 million allocation. (See “China Ready to Place Bets on Hedge Funds,” The Wall Street Journal, June 19, 2009.) Reuters reports CalPERS is making a move in the private equity space by increasing its overall exposure by 40 percent. The pension has also reduced its exposure to equities during this recent move. (See “CalPERS to Boost Private Equity Target,” FINalternatives, June 9, 2009.) Similarly, Teachers’ Retirement System of the State of Illinois is adjusting its alternatives targets from 8 percent to 10 percent for private equity and from 2.5 percent to 5 percent for absolute returns. (See “Illinois Teachers Ups Commitment to Alternatives,” FINalternatives, May 22, 2009.)
These investors that once shied away from the alternatives sector might be giving it another go because the market turmoil has adjusted the mind-set of many funds in the industry. Due to Madoff and other scandals, hedge funds might be lifting their veil of secrecy. BHA research indicates an increase in demand for more transparent funds since these scandals have occurred. Another key factor might be the improved liquidity of alternative investments; some funds are reducing the length of the average lock-up. Also on the liquidity side, managed accounts are coming of age as a source of capital for many alternative investment products. To top all this off, some funds are lowering fees on alternative products due to poor performance in the prior year and lack of demand from investors. This confluence of factors is leading large government institutions to rethink their stale asset allocations and increase their funds’ allocations to altern ative products.
