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Reuters – US Institutions Choose Non-Stock Assets in Volatile Market

US pension funds, charitable groups, endowments and other large institutional investors are taking on more exposure in non-traditional alternative investments – such as private equity and hedge funds – to buffer against volatile stock markets, an investor survey found, writes Reuters. Among 151 US managers surveyed by Natixis Global Asset Management, 76 percent said alternatives are essential in protecting against risk while 73 percent said that they are critical to outperforming the broader market.

Reuters – U.S. pension funds, charitable groups, endowments and other large institutional investors are taking on more exposure in non-traditional “alternative” investments — such as private equity and hedge funds — to buffer against volatile stock markets, an investor survey found on Tuesday.

Among 151 U.S. managers surveyed by Natixis Global Asset Management, 76 percent said that “alternatives” are essential in protecting against risk while 73 percent said that they are critical to outperforming the broader market.

But the move into hedge funds comes as the $2 trillion industry once again underperforms the broad U.S. market indexes. Through the end of August, hedge funds gained around 4 percent, lagging well behind total returns of 13.5 percent in the benchmark Standard & Poor’s 500 index, according to Credit Suisse.

Stock markets have been posting solid returns this year, but have been whipsawed periodically by troubling news, such as economic weakness in Europe and China, the “fiscal cliff” of expiring U.S. tax cuts and automatic government spending reductions next year, and the Federal Reserve’s massive bond-buying programs.

The Natixis survey found that 88 percent of the managers — who each oversee about $30 billion in assets — are satisfied with the performance of the alternatives they invest in and 93 percent would increase or maintain the same alternatives exposure if they could go back and reevaluate.

Natixis Global Asset Management conducted the survey online in June and July, and participants included corporate and public pension funds, funds of funds, sovereign wealth funds, insurance reserves and liabilities, and endowments and foundations.

Natixis Global Asset Management oversaw $711 billion in assets as of June 30 and has investments in affiliates such as Loomis, Sayles and Co, Harris Associates LP, and Aurora Investment Management LLC, which manages funds of hedge funds.

Public plans with more than $1 billion had a median 15 percent exposure to nontraditional investments as of June 2012, the highest ever and up from 9.2 percent in June 2011, according to the Wilshire Trust Universe Comparison Service.

The Natixis survey found that the increased faith in alternatives is an attempt to rescale risk management in the face of market volatility and the threats posed by the euro zone debt crisis and tighter regulation.

Risks such as those of the upcoming elections and Europe are becoming “much more important” to institutional investors, said John Hailer, president and chief executive of Natixis Global Asset Management in the Americas and Asia.

The survey results indicate that the managers are taking an “out with the old, and in with the new” approach to risk management, said Hailer, and view nontraditional assets as attractive and also as a way to get higher returns.

Seventy-four percent of respondents said they have changed their stance toward risk management over the past five years, with the 68 percent majority saying that the euro zone debt crisis will be one of the three main market disruptors over the next two years.

Meanwhile, 85 percent of the managers surveyed anticipate tighter regulatory constraints, and 74 percent said they will face more limitations on their investment choices.

In the global version of the survey that included 482 institutional investors worldwide — including in Asia, Europe, the Middle East, the UK and the United States — 69 percent of participants said that alternative investments are necessary to protect against risk, and 85 percent of the investors were satisfied with the performance of their alternative investments.