I n v e s t o r s r e s p o n d For InstItutIonal use only

Transcription

1 I n v e s t o r s R e s p o n d For Institutional Use Only

2 About JPMorgan Asset Management For more than a century, institutional investors have turned to JPMorgan Asset Management to skillfully manage their investment assets. This legacy of trusted partnership has been built on a promise to put client interests ahead of our own, to generate original insight, and to translate that insight into results. Today, our advice, insight and intellectual capital drive a growing array of innovative strategies that span U.S., international and global opportunities in equity, fixed income, real estate, private equity, hedge funds, infrastructure and asset allocation.

3 FOREWoRD We first reported a growing demand for alternative strategies in our 2 investment survey. Since that time, changes in the investing and economic environments, along with evolving regulations have spurred further innovation and accelerated the adoption of alternative investment strategies. In the first quarter of 2, we talked to approximately 2 institutional investors about alternatives. The response was unequivocal. Alternative strategies, including private equity, real estate and absolute return/hedge funds are now established components of many institutional portfolios. At the same time, infrastructure, portable alpha and green investing are defining their strategic footprint. JPMorgan Asset Management s leadership position in alternative investing has given us a unique perspective in understanding the needs of corporate plans, public funds, endowments, foundations, and other institutions. Our surveys, workshops and conferences enable our clients to gain a better understanding of alternative investing. They also provide a forum for exchanging ideas among peers, learning about new investment strategies and discovering innovative solutions to today s investment challenges. We are deeply grateful to all the institutions that took part in our research and made this report possible. We hope this report will provide you with a benchmark view of the state of U.S. institutional investors in their quest for investment success. Sincerely, John H. Hunt CEO Institutional Americas JPMorgan Asset Management

4 table of contents EXECUTIVE OVERVIEW KEY FINDINGS Part 1: Analysis by ASSET CLASS 1 absolute RETURN/HEDGE FUNDS 1 PRIVATE EQUITY 17 REAL ASSETS: REAL ESTATE 19 REAL ASSETS: INFRASTRUCTURE 22 REAL ASSETS: OTHER 23 PORTABLE ALPHA 2 NET LONG (13/3) 26 GREEN/SUSTAINABLE Part 2: Analysis by INVESTOR SEGMENT 2 CORPORATE PENSION PLANS 32 PUBLIC PENSION FUNDS 36 ENDOWMENTS & FOUNDATIONS Conclusion PARTIAL list of participants

5 executive overview Over the last decade, alternative investments have seen steady growth, to the point that many in the industry question whether they are truly alternative anymore. Our most recent survey of some of the largest U.S. institutional investors should put to rest any lingering doubt. The survey confirms that these strategies now established components of many institutional portfolios are no longer alternative at all. In fact, alternatives now play an essential role in institutional portfolio strategies, and we expect across-the-board allocation increases despite recent market turmoil. Growth in assets, growth in options Our survey results clearly indicate that institutional investors as a whole are embracing all available options within alternatives both the more traditional and the cutting edge. Strong inflows are expected for the largest and most well-established alternative asset classes (real estate, private equity, absolute return/ hedge funds), as well as a range of new, innovative strategies that are already taking hold. For this survey, we expanded the alternatives universe to include several of these newer strategies and found substantial growth potential in categories such as: n Infrastructure, which is becoming an important diversification strategy within real assets, a category increasingly used to refer to tangible assets (e.g., real estate, commodities, infrastructure, farmland/timber, etc.) which can help preserve the real value of portfolios. n Green/sustainable investing, which captures a rapidly emerging trend a non-traditional thematic investment approach that blends economic/ market opportunity with policy considerations and environmental concerns. n Portable alpha and net long (13/3) strategies, which may not be categorized as alternatives, but have a philosophical or functional connection to alternatives. These strategies seek to help investors add alpha to traditional allocations, either by porting alpha from other sources, or making traditional assets work harder and smarter. Alternative strategies and investment approaches are often used to generate the additional alpha. Alternatives are helping investors meet their objectives As investor sophistication increases and plans are less constrained in their views of asset class boundaries and the management of alpha and beta alternatives are playing an ever more important role in enhancing portfolio risk/return characteristics. An expanding opportunity set within alternatives gives investors many more options regarding how and where to incorporate them. Ultimately, some of the most interesting survey data concerns the question of why? Here we see that within each investor segment corporate plans, public funds, and endowments and foundations alternative asset classes are being custom fit into portfolios with a specific purpose, to help address sector-specific issues and challenges. These new tools have been a critical complement to traditional portfolios, and planned increases to alternatives are a testament to their overall effectiveness in helping investors meet their unique objectives. The future of alternatives will not be without challenges e.g., how to access top managers and highquality opportunities. Liquidity, transparency, education, and resource issues will also grow with the size of these allocations. But our survey suggests that, in the view of investors, such concerns continue to be outweighed by the benefits investors are reaping and continue to expect from alternatives. We believe the survey tells a powerful and very positive story about alternatives one that will continue to unfold over the next several years. Next generation alternative investing 1

6 EXECUTIVE OVERVIEW Research methodology This report provides the findings from JPMorgan Asset Management s 2 institutional investor survey Next Generation Alternative Investing. The study, conducted earlier this year, canvassed senior decision makers at the largest U.S. corporate and public defined benefit plans, and Endowments and Foundations (E&Fs) 191 institutions representing approximately $1.26 trillion in assets (Exhibit 1). The survey was conducted for JPMorgan Asset Management by Greenwich Associates, primarily via phone interviews, during first quarter, 2. Corporate and public plan respondents were drawn from Greenwich Associates annual survey of plan sponsors and includes those investing or planning to invest in alternatives. Exhibit 1: Survey respondent base* 76 Corporate plans ($.2 bn avg AUM) 191 respondents $1.26 trillion total AUM (as of 12/31/7) 9 Other ($1.7 bn avg AUM) Public funds ($1 bn avg AUM) 6 E&Fs ($3 bn avg AUM) Exhibit 2 provides a breakdown of respondents by assets under management within each investor segment. It highlights the fact that public fund respondents are, on average, three to four times larger than corporate plan and E&F respondents. Average allocations in our survey report are not dollar-weighted. Therefore, it is important to keep these size differences in mind when considering potential asset flows, because a similar percent change in allocation could generate much larger asset flows from public funds than from corporate plans or E&Fs. Exhibit 3 shows the funded status of pension plan respondents. The management of funded status can influence strategic asset allocation policies and the use of alternatives by these investors. Allocation data was self-reported by survey participants, and all results are based on available responses to specific survey questions. The respondent base may vary across different asset categories i.e., some respondents did not provide data in every category, or answer every question. Such reporting inconsistencies may lead to discrepancies: in some cases the reported total alternative allocation does not exactly match the sum of individual alternative asset class allocations. However, these discrepancies do not affect either the direction or degree of the trends identified in this survey. Exhibit 2: Distribution (%) of respondents by size ($ AUM) Size ($ billions) Total (1) Corporate plans * ( 72) Public funds () E&Fs (6) Taft-Hartleys (9) Avg AUM $.2 bn Avg AUM $1 bn Avg AUM $3 bn Avg AUM $1.7 bn Under $1 6% % 2% 11% 22% $ $ $ $ $ $ $ As of 12/31/7. Results may not sum to 1% due to rounding. $ AUM for corporate and public respondents is for defined benefit plans. Exhibit 3: Distribution (%) of pension plan respondents by funded status Funded status Total (11) Corporate plans (63) Public funds () Taft-Hartleys (7) Less than % 9% 2% -9% 33 2% 3% 96 to 1% Over 1% As of 12/31/7. Results may not sum to 1% due to rounding. * Total and average $AUMs exclude corporate and 2 public funds for which assets were not reported. Other refers to 9 Taft Hartley plans. Due to small sample size, Taft-Hartley responses are only included in total respondent results. 2 next generation alternative investing

7 key findings I. Alternative or essential? Alternatives have become an essential part of portfolio strategies for institutional investors employing them. Growth expectations for alternatives remain strong despite current market disruptions, dislocations, and sub prime contagion. Institutional assets are shifting from the traditional to the alternative. n Among total survey respondents, average allocations to alternatives exceed 1% and are expected to exceed 22% by 21 an increase of over 2% (Exhibit ). Endowments and Foundations (E&Fs) continue to lead the way with a projected 36% of portfolio assets committed to alternatives by 21. n While there are distinct differences among investor segments, an overall alternatives allocation of 2% to 3% is seen as about right. Only 37 said this range was too high, and 2% said it was too low (Exhibit ). On average, E&F portfolios already exceed these allocation levels. n Surprisingly, the rate of growth of alternatives overall and even within asset classes seems unaffected by recent market turmoil. In some cases, allocation increases are the result of investors seeking opportunity in current market dislocations. Exhibit : Overall, respondents feel an allocation of 2% to 3% to alternatives is about right % total respondents (17) n Growth is being driven by a pervasive need to enhance and diversify returns, and alternative allocations are being funded by a shift in allocations away from traditional assets. Across all investor segments, broad issues of diversification and increased returns were cited as the primary drivers of changes to alternative allocations. Too low? 2% Too high? 37% Just right? 3% Exhibit : Allocations continue to shift from the traditional to the alternative Would you say a 2% to 3% asset allocation to alternatives is... Asked of all respondents. Average allocations across all respondents (%) Alternatives 11 2 Fixed Income Total Equity Total Corporate Public E&F Data for 27 and 21 is from this current 2 survey, while data for 2 is from the JPMorgan Asset Management New Sources of Return Survey, 2. In both surveys, corporate and public respondents were drawn from the largest 3 U.S. pension plans, but the composition of the respondent base varies. Base for 2 survey: corporate (6), public (); base for 2 survey (27, 21): total (16, 133), corporate (62, 6), public (39,3), E&F (3,). Note: Totals may not sum to 1% due to rounding. Allocations presented here are averages of allocations provided at the total alternatives, fixed income and equity levels. Similarly, allocations to alternative asset categories (e.g., those presented in Exhibit 6) are averages of allocations provided at the specific strategy level. The number of available responses may differ across component strategies. Therefore, component data will not necessarily sum to these total alternative values. Next generation alternative investing 3

8 key findings II. Sizing up strategies Growth in average allocations is expected across all major alternative asset classes, with absolute return/hedge funds and private equity growing the fastest (Exhibit 6). n Absolute return/hedge funds: These strategies have the highest average allocation of any alternative asset class for current investors in this asset class (Exhibit 7), as well as across all survey respondents, including investors and non-investors (Exhibit ). We estimate that these strategies will account for % of net inflows into alternatives through 21. n Private equity: Growth for this more traditional alternative will also be strong, led by 62% of current investors planning to increase allocations, the highest across all alternative asset classes (Exhibit 9). Given an already high participation rate (7%), the percentage of new investors adding this asset class is expected to be relatively low (Exhibit 1). Exhibit 6: Allocations are expected to increase across major alternative asset classes n Real assets/real estate: This mainstream portfolio component will experience more modest growth receiving a boost from new and existing E&F investors with an increasing emphasis on diversification into non-u.s. assets. III. Diversification within alternatives Investors are emphasizing diversification within their alternative portfolios among various established and new types of alternative strategies, as well as across geographic regions. n As investors seek to diversify holdings within real assets, two asset classes in this category are expected to see substantial growth: Real assets/infrastructure is expected to see its relatively small investor base more than double over the next three years led by new corporate and public plan investors (Exhibit 1). Exhibit 7: Average allocations across all current investors in Average total portfolio allocations (%) investors and non-investors Average allocation (%) Absolute return/hedge funds Private equity Infrastructure/other real assets Real estate Absolute return/ hedge funds (9) (77) Private equity (9) (1) Real estate (11) () Based on respondents currently investing in the specified asset class Total (16) (133) Corporate (62) (6) Public (39) (3) E&F (3) () Note: Allocations presented here are averages of available responses. The number of available responses may differ across component strategies. Allocations in Exhibit are averaged across all available responses at the total alternatives level. Therefore, total alternative allocations in Exhibit do not represent the sum of component allocations presented here Exhibit : Average allocations across all respondents for Average allocation (%) Absolute return/ hedge funds (129) (116).9 6. Private equity (126) (112).1. Real estate (13) (116) Average allocations are calculated across all respondents including investors and non-investors in the specified asset class. Respondent base is in parenthesis. next generation alternative investing

9 key findings Other real assets (e.g., oil & gas, commodities, farmland/timber, maritime, etc.) will see the greatest growth from allocation increases by current investors largely E&Fs with moderate growth among new investors (Exhibits 9, 1). n Portable alpha is currently used by 31; an additional 1% expect to add these innovative strategies by 21 (Exhibit 11). Exhibit 9: Percentage of all current investors planning to increase (decrease) allocations to 9 3 Absolute return/ hedge funds (13) Absolute return/ hedge funds (1) 7 62 Private equity (12) Exhibit 1: Participation rates percentage of total respondents currently investing or planning to invest in Private equity (17) Plan to increase Currently invest Real estate (12) Real estate (12) Infrastructure (17) Infrastructure (12) Plan to decrease Other real assets () Based on respondents currently investing in the specified asset class. Plan to invest 3 Other real assets (17) Exhibit 11: Participation rates percentage of total respondents currently investing or planning to invest in Getting the big picture: Exhibit 6, in combination with Exhibits 7 through 11, capture our broad findings regarding the growth of individual alternative asset classes across the total survey respondent base. Similar exhibits throughout this report provide additional detail at the investor segment level. n Exhibit 6 shows average alternative allocations current 27 and anticipated 21 across all survey respondents, including both current investors and non-investors (those planning to invest and those not considering investing) in the specified asset classes. This view captures the impact on growth of both new investors adopting these strategies and existing investors planning to increase or decrease current allocations. n Exhibit 7 shows current 27 and expected 21 average allocations across all respondents currently investing in the specified asset class. n Exhibit shows current 27 and expected 21 average allocations for all respondents including both investors and noninvestors. n Exhibit 9 shows the percentage of respondents currently investing in and planning to increase (decrease) allocations to the specified asset class. 31 Currently invest 2 Plan to invest n Exhibit 1 shows current investor participation rates, as well as the percentage planning to invest. 1 Portable alpha (17) 9 Net long equity (13/3) (173) Green, sustainable (1) n Exhibit 11 shows current investor participation rates, as well as the percentage planning to invest in newer alternatives. Next generation alternative investing

10 key findings n Net long equity strategies (e.g., 13/3) are used by about a quarter of investors, with 9% intending to add them, primarily to enhance returns of traditional equity allocations (Exhibit 11). n Green/sustainable, with a small current investor base, showed surprising strength, with a significant boost expected from public funds over the next three years. n Survey results reveal a fast-growing emphasis on geographic diversification. Among all alternative asset classes, this trend is most evident in real estate. However, the appeal of non-u.s. assets is also evident in private equity. IV. Investor dynamics Although all investors share a common need for return enhancement and diversification, the growth dynamics of alternatives play out differently in each investor segment, due to unique issues and concerns e.g., institutional objectives, regulatory challenges, financial and board constraints, and levels of experience. (In-depth discussion of the dynamics within individual investor segments is provided in subsequent sections of the paper.) n Corporate plan sponsors appear somewhat more cautious than other investors with regard to alternatives. We see this posture driven primarily by regulatory and accounting reforms, which pose a twopronged challenge for corporate plan sponsors: controlling the impact of the plan on corporate financials, while still earning returns sufficient to meet benefit obligations. Among corporate plans, specifically, over the next three years: Absolute return/hedge funds, infrastructure, and portable alpha will have the highest rate of new investors. Private equity shows the highest percentage of current investors planning to increase their allocations. While absolute return/hedge fund allocations may see somewhat slower growth among corporate versus public funds, we expect this asset class to account for the largest increase in alternative dollar flows for corporate pension portfolios. n For public funds, the main issue of concern is consistently delivering required returns to meet benefit obligations over the long term, leading to a sharp focus on improving risk-adjusted performance of the overall portfolio. As a result, the current posture of public funds toward alternatives is more active than for corporate plans, particularly as they diversify beyond real estate and catch up with corporate allocations to absolute return/hedge funds. In absolute return/hedge funds, our survey indicates that public funds will show strong growth among new and existing investors in this asset class. Private equity will also show strong growth, driven by increasing allocations from public funds currently investing in the asset class. For real estate a longtime anchor of public funds alternative portfolios we expect average allocations to remain flat, with a shift toward international and global investments. Infrastructure will be a growth area, as public funds work to diversify their sometimes large real estate holdings with other real assets. Green/sustainable is also growing rapidly, albeit from a small base, with a participation rate expected to nearly triple by 21. Finally, GASB accounting for Other Postemployment Benefits (OPEB) is in transition, and at the time of our survey, there was a great deal of uncertainty around whether, and to what extent, these benefits would be pre-funded, as well as the role alternatives are likely to play in investing assets set aside for funding. n For Endowments and Foundations (E&Fs) the challenge is to maintain current payouts while protecting the real value of assets. Due to their unique skill set and experience level, E&F alternative allocations are 7% to 1% larger than those for public and corporate plan sponsors, and they have a distinct approach to alternative investing (at least among the larger investors): They generally have a more pronounced opportunistic posture. 6 next generation alternative investing

11 key findings They are typically comfortable with much higher allocations. Some view portfolio components purely in terms of alpha and beta. For E&Fs, we expect to see the following trends over the next several years: Strong growth in private equity, led by a 2% increase in average allocations among E&Fs currently investing in the asset class. A slower growth rate in absolute return/hedge fund allocations for those currently investing. Real estate will be a dynamic asset class for E&Fs reflecting their opportunistic bias. In other real assets, E&Fs are expected to continue to lead the way with the highest participation rates by far, as well as the highest rate of new entrants. V. Meeting expectations For the vast majority of investors surveyed, alternative investments are currently meeting performance expectations, across asset classes. n Currently, investors show a relatively high rate of satisfaction across all alternative categories, with E&Fs showing a slightly lower satisfaction level overall (Exhibit 12). VI. Growing pains Growth continues, despite some common concerns and constraints. n As the number of participants in alternative markets increases, and we see larger inflows, investors are most concerned about the potential impact on performance. Two of the top three concerns cited by respondents focused on declining returns and overcrowding of the alternatives space (Exhibit 13). Concerns do vary to a degree across client segments: E&Fs show the highest sensitivity to issues of falling performance and overcrowding. Public funds are notably more concerned about a strain on their staffing and oversight capabilities. Corporate plans are more worried than their counterparts about volatility, particularly with respect to funded status. n Among the most frequently cited factors preventing investment in additional alternative asset classes are the need to obtain board approval and to gain a greater degree of comfort/knowledge with specific alternative investments. n While fees are not cited among the top investor concerns, there is clearly emerging pressure on fees. Investors believe that fees are fair as long as Exhibit 12: Percentage of respondents indicating that performance expectations are being met Infrastructure (1) () (1) () Commodities Real estate Absolute return strategies Private equity Hedge funds (31) () (3) (23) (1) (3) (33) (32) (7) (23) (1) (3) () (27) (1) (39) (77) (26) (1) (3) Total (17) Corporate plans (6) Public funds () E&Fs (6) Most commonly mentioned benchmarks Infrastructure: No clear benchmark Commodities: CPI plus bps Real estate: NCREIF Index Absolute return: T-bills plus 6 bps Private equity: S&P plus 3 bps Hedge funds: T-bills plus 3 6 bps I am going to read you a list of asset classes and would like you to tell me what long-term (1 to 1 years) return benchmarks your plan applies to each asset class, and whether they are currently meeting performance expectations. Next generation alternative investing 7

12 key findings performance expectations are met, which should be a red flag to managers that there could be a backlash on fees, or a greater demand for performancebased fee schedules, should performance start to lag expectations (Exhibit 1). Within specific investor segments: Public funds showed the highest absolute sensitivity to fees. E&Fs were by far the strongest advocates for charging fees per unit of alpha. Exhibit 13: Greatest concerns as alternatives become more popular with respect to managing portfolios in the current market environment % of total respondents citing Falling returns/performance Liquidity Overcrowding of space No concerns Risk Quality managers/tools Staffing/oversight capabilties Transparency Volatility Fees Valuations Accounting concerns Blow up/melt down Counterparty relationship Global recession Other As alternative investments become more popular, what is your greatest concern with respect to managing your plan assets/portfolio in the current market environment? Multiple responses accepted. Respondent base = 176. Exhibit 1: Emerging pressure on fees Fees are fair, as long as return expectations are met Fees charged for alternative investments are too high Fees should be viewed on a per unit of alpha basis Fees are coming down, but our fund is still hesitant to implement Our plan is quite comfortable with fees charged for alternative strategies Total (17) Corporate plans (6) Public funds () E&Fs (6) Which one of the following statements best describes your view of fees charged to manage alternative strategies? next generation alternative investing

13 PART 1. analysis by asset class Preface While no one should be surprised that overall use of alternatives is quite high and still growing our survey did uncover some unexpected trends within this overall growth story: n Within our survey base, the largest dollar flows into absolute return/hedge fund strategies over the next several years are expected to come from public funds. n Real estate should see significant inflows from E&F investors, who also plan large increases to private equity allocations. n Newer categories of alternatives e.g., infrastructure and other real assets, green/sustainable, portable alpha and net long equity (13/3) all show strength and will see significant increase in usage by 21. n A substantial shift toward international and global assets is taking shape in real estate and, to a somewhat lesser extent, in private equity. In addition, as alternatives become an essential part of institutional portfolios, there is a steady blurring of lines as to what constitutes an alternative and in which asset-allocation buckets different strategies belong. For example, equity 13/3 strategies, while hedge fund-like in their use of shorting, are most often categorized as traditional equity. Infrastructure could fall into private equity or real estate, depending on the underlying asset and type of fund used to access it. Real estate itself is increasingly bucketed under real assets. And green/sustainable could be classified as infrastructure (e.g., power projects), long only (e.g., eco-friendly stocks), or even real estate (e.g., green building funds). As the use of alternatives continues to grow, these strategies will open new possibilities for investors to rethink traditional notions of both asset class and asset allocation. And we believe that alternatives will continue to present greater opportunity to add alpha through new approaches to efficient portfolio design. The following asset-class discussions provide details of how these growth and diversification trends are playing out within specific segments of the alternatives market: A. Absolute return/hedge funds B. Private equity C. Real assets: Real estate D. Real assets: Infrastructure E. Real assets: Other F. Portable alpha G. Net long (13/3) H. Green/sustainable Next generation alternative investing 9

14 ANALYSIS BY asset class: absoulute return / hedge funds Absolute Return/Hedge Funds Absolute return/hedge funds are the youngest of what could be called traditional alternative asset classes i.e., real estate, private equity, absolute return/hedge funds. As such they show the lowest overall participation rate, as corporate and public pension plans steadily ramp up their exposure. But thanks to relatively higher liquidity and the ability to diversify across a range of strategy types, these strategies also show the highest average portfolio allocation of any alternatives category across existing investors in this asset class, as well as across total survey respondents. Clearly, for those that use these strategies, they are an essential portfolio component. Over the next few years we expect to see dynamic growth in absolute return/hedge funds from a number of sources. It is one of the few asset classes expecting strong growth from both new investors adding these strategies and existing investors increasing their allocations. This dual-engine growth dynamic differs from other types of alternatives, where growth is expected to come predominantly from either existing investors or new investors, but seldom from a more balanced combination of both. Exhibit 1: Percentage of respondents investing or planning to invest in absolute return/hedge funds by 21 Exhibit 16: Average allocations among current absolute return/ hedge fund investors Average allocation (%) 1 9 Investing Planning to Total (1) Corporate (7) Public () E&Fs (3) Total (9)(77) Corporate (27)(2) Public (1)(17) E&Fs (37)(3) Exhibit 17: Average allocations to absolute return/hedge funds among all respondents Exhibit 1: Percentage of current absolute return/hedge fund investors planning to increase (decrease) allocations by 21 Average allocation (%) Increasing Decreasing 6 Total (129)(116) Corporate (2)(7) Public (3)(2) E&Fs ()() Total Corporate Public E&Fs (13) (29) (2) () Averages reflect investors and non-investors. Respondent base is in parenthesis. 1 next generation alternative investing

15 ANALYSIS BY asset class: absoulute return / hedge funds n Growth highlights in absolute return/hedge funds: Absolute return/hedge funds are expected to account for over % of net new dollars invested in alternatives by survey respondents in the next three years. A rapid rate of increase is expected in the percentage of corporate and public plans using this asset class: +3% and +3%, respectively, by 21 (Exhibit 1). Allocations should increase at a rate of 13% to 2% among current investors (Exhibit 16), and 16% to 9% across total respondents (Exhibit 17), with public funds showing the fastest rate of allocation increase. More than half of current investors plan to increase allocations (Exhibit 1) again, with public funds showing the strongest increases. n Public funds are expected to be the most dynamic investors and a key driver of asset flows a surprising result when compared with our 2 survey results for hedge funds. In the earlier survey, public funds trailed corporate plans in participation (1% versus 3%) as well as in existing investor allocations (% versus % of overall portfolio assets). 1 By 21, we expect the reverse to be true for absolute return/hedge funds, with public funds showing: the largest percentage planning to invest the largest percentage of existing investors increasing allocations (with no decreases) the fastest rate of allocation increase across all investor segments participation rates exceeding that of corporate plans n E&Fs still show a healthy appetite for further allocations to absolute return/hedge fund strategies, despite a near 1% participation rate and allocation rates substantially higher than other investor segments. More than half of E&Fs are targeting still higher allocations, with expected allocations among current investors to exceed 1% of total portfolio assets by 21 (Exhibit 16). n All investors cite a common need to improve riskadjusted portfolio performance as a chief driver of allocations to absolute return/hedge funds des cribed variously as increased diversification, volatility reduction, and/or return enhancement (Exhibit 19). Exhibit 19: Most frequently cited reasons for increasing allocations to absolute return/hedge funds Diversification/ decrease volatility Increase return Improve risk/return 1 17 Decrease fixed Income/equity 1 Increase fixed income, liability/regulatory 19 Corporate plans (21) Available opportunities 6 12 Public funds (1) E&Fs (26) What is driving these allocation changes to absolute return/hedge funds? Multiple responses accepted. 1 JPMorgan Asset Management New Sources of Return Survey, 2 Next generation alternative investing 11

16 ANALYSIS BY asset class: absoulute return / hedge funds n But individual investor segments show different preferences and sensitivities in how they access these strategies: Vehicle preferences show clear distinctions among investor segments (Exhibit 2): E&Fs use single manager funds most often a possible reflection of their longer experience and higher degree of confidence with these types of strategies. Corporate and public plans, by comparison, use fund-of-funds vehicles when accessing multi-strategies, but use single managers for single strategies. This could be a reflection of a preference for core/satellite approaches. In addition, fund-of-funds can be an efficient way for new investors to establish a diversified portfolio, gain access to top managers and accomplish their due diligence in a less resource-intensive way important considerations for these investor segments, which have low participation rates and a high number of new investors adding this asset class. Top 3 challenges are also seen differently across investors. Though transparency is cited as the top challenge for all investors, E&Fs differ markedly from corporate and public pension plans on other issues (Exhibit 21). E&Fs showed the least sensitivity to fees and the highest sensitivity to manager access. Corporate and public plans showed much higher sensitivity to fees and headline/reputation risk. Public funds showed the most concern about board approval. Lock-ups longer than one year affect investor decisions to varying degrees across segments (Exhibit 22). Here again, we see the established pattern of E&Fs showing the greatest flexibility. Corporate plans showed the most cautious approach, with public funds in the middle. Exhibit 2: Percentage of respondents currently investing or planning to invest in absolute return/hedge funds via... investing or planning to invest Fund-of-funds, multi-strategy 27 Currently investing 37 2 Planning to 1 17 Single manager, single strategy Single manager, multi-strategy 17 2 Fund-of-funds, single strategy Corporate plans (1) Public funds (29) E&Fs (2) Does your plan currently/plan to access absolute return/hedge funds via Multiple responses accepted. Asked of those currently investing or planning to invest in absolute return/hedge funds. 12 next generation alternative investing

17 ANALYSIS BY asset class: absoulute return / hedge funds Exhibit 21: Top three challenges to investing in absolute return/hedge funds citing... Transparency 37 6 High fee arrangements Headline risk/ reputation risk Liquidity Access to top-performing managers Resources and expertise 1 2 Corporate plans (6) Board approval 9 2 Public funds (1) E&Fs () What are the top three challenges you face when considering investments in absolute return or hedge funds? Asked of all respondents. Multiple responses accepted. Exhibit 22: Would you invest in an absolute return/hedge fund strategy with a lock-up longer than one year? Corporate plans Public funds E&Fs No 1% No 33% No 6% Yes % Yes 6% Yes 2% (Based on 61 respondents) (Based on respondents) (Based on respondents) Have you invested or would you consider investing in funds requiring a lock-up longer than the typical one year? Asked of all respondents. Next generation alternative investing 13

18 ANALYSIS BY asset class: PRIVATE EQUITY Private Equity Private equity, a more traditional alternative, shows strong participation within each investor segment. Overall participation in this asset class (across all respondents ) is on par with real estate, a longtime staple of alternative portfolios. Private equity also shows a high percentage of current investors (62%) planning to increase their allocations the highest percentage of any alternative asset class. As a result, private equity can be expected to see strong growth over the next several years, due to substantial inflows from existing investors as they manage the impact of the private equity cycle (commitments, investments, distributions) on reaching target allocations. n Growth highlights in private equity: E&F investors currently lead the way with nearly 1% participation in this asset class (Exhibit 23), the largest average allocations, and the greatest expected allocation increase (+2%) by 21 more than double the rate of increase for corporate or public funds both for current investors in this asset class, and across all survey respondents (Exhibits 2, 2). Public pension plans are not far behind E&Fs, however, with a participation rate of 76% and nearly a third of non-investors adding this asset class by 21 (Exhibit 23). In addition, public funds have the highest percentage of current investors planning to increase allocation by 21 (Exhibit 26). Additionally, while public fund allocations are expected to grow 1% by 21 less than half Exhibit 23: Percentage of respondents investing or planning to invest in private equity by 21 7 Investing 63 Planning to Exhibit 2: Average allocations among current private equity investors Average allocation (%) Total (17) Corporate (71) Public (6) E&Fs () Total (9)(1) Corporate (33)(29) Public (2)(1) E&Fs (3)(33) Exhibit 2: Average allocations to private equity among all respondents Average allocation (%) Exhibit 26: Percentage of current private equity investors planning to increase (decrease) allocations by 21 Increasing Decreasing Total (126)(112) Corporate ()(6) Public (32)(2) Averages reflect investors and non-investors. Respondent base is in parenthesis. E&Fs ()(3) Total Corporate Public E&Fs (12) () (32) (6) 1 next generation alternative investing

19 ANALYSIS BY asset class: PRIVATE EQUITY as much as E&Fs public fund respondents portfolios are, on average, more than four times larger. So private equity should see substantial, and perhaps even greater dollar flows from public funds than from E&Fs. Corporate plans have higher allocations, on average, than public funds and a comparable rate of allocation increase among current investors (Exhibit 2). But corporate plans also show the lowest participation rate in private equity (Exhibit 23) and the lowest percentage of current investors planning allocation increases (Exhibit 26). We believe this posture is consistent with their cautious overall approach to alternatives over the next several years. n International allocations are strong and expected to grow with an average non-u.s. allocation of 17% of private equity portfolios, across all current investors. E&Fs show the greatest comfort and diversification abroad (Exhibit 27), with the highest participation rate in every category except international developed. They are much more comfortable with Asia/Pacific markets, and significantly more open to global strategies. This is not surprising given E&Fs overall expertise with alternatives and their need for diversification as their alternative portfolios continue on a rapid growth trajectory. Corporate and public plans, by comparison, show a preference for Europe and other international developed markets. However, corporate plans appear to be diversifying more quickly into Asia/ Pacific and emerging markets. n Where fund vehicles are used to access private equity, investor choices are similar to those for hedge funds with corporate and public funds using fund-of-funds vehicles for multi-strategy funds, and single managers for single strategies, E&Fs have a clear preference for single manager funds (Exhibit 2). Exhibit 27: Percentage of respondents currently investing or planning to invest in private equity in... Currently investing Planning to Europe Asia/Pacific 13 2 International developed Global Emerging markets Corporate plans () Public funds (3) E&Fs (2) Where, other than the U.S., does your plan currently or plan to invest in the future in private equity? Asked of respondents currently or planning to invest in private equity. Multiple responses accepted. Next generation alternative investing 1

20 ANALYSIS BY asset class: PRIVATE EQUITY Exhibit 2: Percentage currently investing or planning to invest in private equity via Currently investing Planning to Fund-of-funds, multi-strategy Single manager, single strategy Single manager, multi-strategy Fund-of-funds, single strategy Corporate plans () Public funds (3) E&Fs (2) Does your plan currently/plan to access private equity funds via [What is driving our allocation increase to private equity is] diversification, liquidity premium, enhanced returns... [We are looking at] venture, small and medium-size buyouts. Endowment 16 next generation alternative investing

21 ANALYSIS BY asset class: REAL ESTATE REAL ASSETS: REAL ESTATE Real estate is the most commonly used alternative asset class, with overall participation rates slightly higher than private equity. And somewhat surprisingly, the survey showed no overall pullback from real estate, despite recent market turmoil (this survey was conducted during the first quarter of 2). In fact, more than a third of non-investors indicated that they would be adding this asset class by 21, and allocations should see a slight increase both across current investors and all respondents driven primarily by inflows from E&Fs. Within this trend, however, there is a significant shift expected toward non-u.s. assets, across all investor segments, led by corporate plans and E&Fs. n Growth highlights in real estate: E&Fs, which have the lowest overall allocations to real estate (Exhibits 3, 31), are expected to show the greatest rate of increase over the next three years, with a strong international emphasis and a reduction in the U.S. share of real estate portfolio assets. Among public funds the largest group of real estate investors allocations are expected to remain flat among current investors (Exhibit 3), as well as among all public fund respondents (Exhibit 31). Corporate plans are anticipating slightly higher overall allocations (Exhibits 3, 31), but still have the lowest participation rate (Exhibit 29) and the lowest percentage of current investors planning allocation increases (Exhibit 32). Exhibit 29: Percentage of respondents investing or planning to invest in real estate by 21 Exhibit 3: Average allocations among current real estate investors Currently invest 9 Plan to invest Average allocation (%) Total (12) Corporate (72) Public () E&Fs (3) Total (11) () Corporate (3) (31) Public (3) (27) E&Fs (29) (27) Exhibit 31: Average allocations to real estate among all respondents Exhibit 32: Percentage of current real estate investors increasing/(decreasing) allocations by 21 Average allocation (%) Increasing Decreasing Total (13) (116) Corporate (2) (7) Public (3) (2) E&Fs () (3) Averages reflect investors and non-investors Total Corporate Public E&Fs (12) (3) (39) () Next generation alternative investing 17

22 ANALYSIS BY asset class: REAL ESTATE n E&F investors are expected to make a substantial commitment to real estate over the next several years. We believe that E&F s large anticipated commitment to real estate reflects their generally more opportunistic posture. Over the next three years, E&Fs will have: the highest percentage of new investors, with more than 6% of E&F non-investors adding real estate to their portfolios (Exhibit 29) a participation rate nearly equaling public funds by 21 the largest allocation increases of any investor segment: +26% among current investors and +3% across all E&F respondents (Exhibit 3, 31) the largest percentage of current investors increasing allocations (Exhibit 32) n A strong global diversification trend is expected. Real estate investors currently show a strong bias toward domestic U.S. assets with E&Fs showing less domestic reliance than other investors (Exhibit 33). But survey data suggests that this will change dramatically over the next several years, with a greater percentage of investors investing abroad (Exhibit 33). Additionally, international and global shares of both real estate and REIT portfolios are expected to increase significantly (Exhibits 3, 3). Exhibit 33: Percentage of respondents currently investing or planning to invest in real estate in U.S. Continental Europe International developed Global Canada U.K. Asia/Pac Emerging markets Currently investing 77 7 Planning to 2 Corporate plans (2) Public funds () E&Fs (9) Where does your plan currently or plan to invest in real estate? Asked of respondents currently investing or planning to invest in real estate. Multiple responses accepted. Exhibit 3: Expected net change in percentage of direct real estate portfolio allocated to Global International U.S. domestic Exhibit 3: Expected net change in percentage of REITs portfolio allocated to Global International U.S. domestic Corporate (39) Corporate (1) Public (32) Public (26) E&F (29) E&F (16) What percentage of your direct real estate portfolio (ex-reits) is currently invested in or do you plan to invest in (region) by 21? Asked of respondents currently or planning to invest in direct real estate and/or REITs. Respondent base is in parenthesis. What percentage of your REITs portfolio is currently invested in or do you plan to invest in (region) by 21? Asked of respondents currently or planning to invest in direct real estate and/or REITs. 1 next generation alternative investing

23 ANALYSIS BY asset class: INFRASTRUCTURE REAL ASSETS: INFRASTRUCTURE Growth in this asset class is expected to be strong, with the overall participation rate among institutional investors doubling by 21, led by a high rate of new corporate plans and public funds adding this asset class. In addition, more than half of current investors expect to increase allocations. n Strong growth is expected from new investors among corporate plans and public funds (Exhibit 36): Public funds will lead infrastructure investing; we believe that this strong growth reflects a need to diversify large real estate holdings with other real assets. Corporate plans will see similar growth, driven largely by diversification needs, as well as the long-term, bond-like profiles of core infrastructure investments. E&Fs currently have the highest participation rate in infrastructure investing, but results suggest growth in this investor base could slow perhaps reflecting a need for non-investors to gain more knowledge of and comfort with these investments. n Despite strong growth, infrastructure still poses challenges for investors: Investors show wide disparity in how infrastructure is classified in terms of asset allocation (Exhibit 37), i.e., as private equity, real assets, fixed income, or its own discrete asset class. We believe that such wide variations result from the diversity in underlying assets and vehicles used to access infrastructure opportunities. In addition, a large percentage of respondents indicated that they lack familiarity and comfort with these strategies, which suggests that asset managers will be required to provide more investor education and support for overall growth in this asset class to continue (Exhibit 3). Exhibit 36: Percentage of respondents investing or planning to invest in infrastructure by Investing Planning to 3 21 Total (12) Corporate (69) Public (6) E&Fs (29) Exhibit 37: How do investors classify infrastructure? classifying infrastructure as... Real assets Private equity Real estate Fixed income Corporate plans (36) Public funds (22) E&Fs (2) Other To which asset class does/would your plan (be likely to) allocate infrastructure investments? Asked of all respondents. Multiple responses accepted. Next generation alternative investing 19

24 ANALYSIS BY asset class: INFRASTRUCTURE n North America will see the lion s share of inflows into infrastructure investment (Exhibit 39) unlike real estate where we see a clear global diversification trend. However, investors cite global capabilities as one of their top criteria when evaluating infrastructure managers, suggesting that this initial domestic bias may reverse (as it has in real estate) as investors comfort and expertise increase. n Investors share a strong opportunistic view of infrastructure (Exhibit ): Not surprisingly, E&Fs show the strongest bias toward opportunistic strategies. Corporate plans, by comparison show the lowest preference for opportunistic strategies and the highest preference for debt-like strategies, possibly a reflection of their emphasis on managing surplus volatility. n Closed-end funds are expected to be the most commonly used vehicle (Exhibit 1): An approximately equal percentage of investors plan to add closed-end funds and open-end funds. However, closed-end funds will continue to have much higher overall usage 6% for closed-end funds versus 2% for open-end funds. We believe that this bias could be a function of availability, with the asset management industry currently offering largely closed-end investment vehicles. Only an additional plan to add direct infrastructure investments to their portfolios perhaps not surprising given investors stated lack of familiarity and comfort with this asset class. Exhibit 3: What is preventing investment in infrastructure? citing Lack of knowledge/ comfort 23 Plan/board policy 2 1 Lack of liquidity 1 Less potential for higher return 6 1 Risk 13 High volatility 1 Corporate plans () High correlation to other assets 2 6 Public funds (22) E&Fs (1) What are the top two reasons preventing your plan from investing in infrastructure strategies? Asked of all respondents not currently or planning to invest in infrastructure. 2 next generation alternative investing

25 ANALYSIS BY asset class: INFRASTRUCTURE Exhibit 39: Where will investors invest in infrastructure? planning to invest in... North America 6 Global 26 Emerging Markets 17 Asia/Pacific Europe Int'l Developed Other 9 Geographically, where will you be investing in the future in infrastructure Asked of all respondents currently or planning to invest in infrastructure. Respondent base = 23. Multiple responses accepted. Exhibit : What type of infrastructure investments are of greatest interest? likely to invest in... Opportunistic Existing Development (New) Debt-like 23 Other Corporate plans (26) Public funds (1) E&Fs (23) Based on your risk/return objectives, which of the following would your plan be likely to invest in, in the future? Asked of all respondents. Respondent base is in parenthesis. Multiple responses accepted. Exhibit 1: How are investors currently accessing (planning to access) infrastructure? Closed-end funds 2 1 Open-end funds 1 1 Direct investments 13 Listed infrastructure securities 3 3 Currently accessing Planning to access Does your plan currently or plan to access infrastructure via...? Asked of all respondents currently or planning to invest in infrastructure. Respondent base =. Multiple responses accepted. Next generation alternative investing 21

26 ANALYSIS BY asset class: OTHER real assets REAL ASSETS: OTHER (Commodities, oil & gas, timber/ farmland, maritime, and precious metals) While just over a third of all respondents say they invest in other real assets (commodities, oil & gas, timber/farmland, maritime and precious metals), that figure can be a bit misleading, because E&F investors are far more active in this asset class than either corporate plans or public funds. Moderate growth can be expected over the next several years, driven predominantly by existing investors increasing their allocations. n E&F investors should drive most of the growth in this asset class given that: E&Fs have the highest participation rate of any investor segment (Exhibit 2). Nearly a third of E&Fs not currently investing plan to add other real assets by 21. n Diversification appears to be the primary driver of investment in other real assets (Exhibit 3) the other key drivers are split almost equally increasing returns, meeting allocation targets, and hedging inflation. n Investors do not show a strong preference in terms of investment vehicles (Exhibit ) closed-end funds hold a slight edge (3%) with direct investments slightly lower (31%), and open-end funds somewhat below that. Exhibit 2: Percentage of respondents investing or planning to invest in other real assets by 21 Investing Planning to Total (17) Corporate (71) Public (6) E&Fs (1) Exhibit 3: Most frequently cited reasons for increasing allocations to other real assets citing... Diversification Increase in expected returns Meet target allocation Exhibit : Percentage currently accessing or planning to access other real assets via... Primary closed-end funds Direct investments Primary open-end funds Inflation hedge Other 1 1 Currently accessing Planning to access What is driving these allocation changes to other real asets? Asked of respondents currently investing or planning to invest in other real assets. Respondent base = 36. Multiple responses accepted. Does your plan currently/plan to access investments in other real assets via... Asked of respondents currently investing or planning to invest in other real assets. Respondent base = next generation alternative investing

27 ANALYSIS BY asset class: PORTABLE ALPHA PORTABLE ALPHA We include portable alpha in this survey because these strategies which seek to add alpha without changing a portfolio s underlying strategic allocation are clearly non-traditional and often employ alternative strategies, or an investment approach closely linked to alternatives, as the driver of alpha. n Key highlights for these investment strategies include: Currently three in 1 respondents use portable alpha, and that figure is expected to grow by approximately % over the next few years (Exhibit ). Corporate plans are expected to see the greatest increase in the percentage of plans employing these strategies, with participation rates nearly doubling to over % by 21. Public funds have the highest participation rate thus far, but that could slow in the near term, as many public funds are considering employing these strategies, but have not yet committed to implementing them (Exhibits, 6). n For the largest segment of potential users (corporate plans and E&Fs) implementation of portable alpha strategies is being driven by issues of potential alpha generation and diversification (Exhibit 6). Exhibit : Percentage of respondents using or planning to use portable alpha by 21 Using Planning to Considering investing* Total (17) Corporate (69) Public ()* E&Fs (7) * Among public funds, a very high percentage (about 2%) indicated they were considering investing in portable alpha, but not committed to implementing by 21. Exhibit 6: Most frequently cited reasons for changes to the use of portable alpha strategies citing Potential alpha generation Diversification 1 6 Considering implementing 2 Shifting allocations from bonds 1 Corporate plans (21) Public funds (21) E&Fs (13) What is driving the changes to your plan s use of portable alpha strategies? Asked of those planning to increase/decrease their use of portable alpha strategies. Multiple responses accepted. Next generation alternative investing 23

28 ANALYSIS BY asset class: PORTABLE ALPHA For the majority of portable alpha investors, U.S. equity is the source of beta (Exhibit 7), though over half of E&Fs using these strategies have ported alpha over domestic fixed income. Sources of alpha vary, with fixed income and domestic equity the most frequently employed, followed by hedge funds and international equity. What is driving [our use of portable alpha] is low interest rates and more alpha octane on the bonds. Corporate plan Exhibit 7: What sources of beta are being used in portable alpha strategies? citing U.S. Equity 77 7 Domestic Fixed Income International Equities Corporate plans () Other 16 Public funds (31) E&Fs (19) Source: Greenwich Associates annual survey of plan sponsors and endowments with over $1billion in total plan assets. Multiple responses accepted. Respondent base is in parenthesis. 2 next generation alternative investing

29 ANALYSIS BY asset class: NET LONG (13/3) NET LONG (e.g., 13/3 strategies) Only a minority of respondents (29%) consider net long (13/3) strategies an alternative. The vast majority include these strategies in their long only allocations (Exhibit ). We included them in this study because they are generally less benchmark-constrained, and they rely on approaches philosophically close to alternatives (e.g., shorting). n Approximately one quarter of respondents use these strategies, with reasonably strong growth expected among both corporate plans and public funds (Exhibit 9). n Shorting was cited by respondents as the top reason preventing them from using net long strategies citing risk of using short strategies and track record/experience of the manager in using short strategies. n Investors showed approximately equal interest in both fundamental and quantitative strategies, as well as both international and domestic strategies. The way we look at [net long (13/3) investing is that it] frees up the manager to more fully access their capabilities. Getting more out of the dollar we invest. Public fund Exhibit : Most respondents classify net long (13/3) strategies as part of long-only assets Exhibit 9: Percentage of respondents investing or planning to invest in net long (13/3) equity strategies by 21 % classifying as part of... 29% Alternative investments allocation Investing 9 Planning to % Long only allocation Total (173) Corporate (71) Public () E&Fs (9) Where do you allocate net long (13/3) strategies? Asked of respondents investing in net long (13/3) strategies. Respondent base = 63. Next generation alternative investing 2

30 ANALYSIS BY asset class: GREEN/SUSTAINABLE Green/sustainable Green/sustainable investing is showing surprising strength, especially among E&F investors and public funds. Key highlights for this non-traditional thematic investment approach include: n E&Fs have led the way thus far, with 27% of respondents investing and another 6% planning to invest in green strategies, bringing the total to a third of E&F investors (Exhibit ). New E&F investors, however, are expected to be few in the near term. n Public funds, by contrast, will be the engine of growth, nearly tripling their participation in green investing by 21. The increase is likely due, in part, to a concerted effort by some state officials to channel more funding toward this area. n Corporate plans will double their participation rate for this category but are starting from a small base and are expected to be slower in moving into these strategies (Exhibit ). n The most popular approach to green investing is through direct private investment (Exhibit 1), with closed-end funds expected to gain ground, and open-end funds used only rarely. We are invested in infrastructure that focuses on green/sustainable. Endowment There is a social aspect to this... you have to weigh the social against the fiduciary responsibility... Public fund Exhibit : Percentage of respondents investing or planning to invest in green/sustainable strategies by 21 Exhibit 1: Percentage of respondents accessing or planning to access green/sustainable strategies via Investing Planning to 6 Direct private investments Total (1) 7 7 Corporate (67) 19 1 Public (2) 27 E&Fs (33) Primary closed-end funds Primary open-end funds Both open and closedend funds Other Currently accessing Planning to access Does your plan currently/plan to access green/sustainable investments via Asked of all respondents investing or planning to invest. Respondent base = next generation alternative investing

31 PART 2. analysis by INVESTOR SEGMENT Preface As with the discussion of asset class growth, we begin by noting that no one should be surprised that institutions are committed to increasing their overall portfolio allocations to alternatives. There are, however, some notable results within the overall growth story that highlight the flexibility of alternatives to meet specific investor needs: n Corporate plans, though more cautious than other investors, still plan steady increases in alternatives to meet their need for diversified sources of return. This need goes hand-in-hand with their efforts to increase fixed income allocations and durations in order to manage interest rate risk, while decreasing and diversifying equity exposure to manage the volatility of returns. Increasing exposure to absolute return/hedge funds, implementing portable alpha strategies and taking advantage of the debt-like nature of long-term infrastructure investments can be expected to play a significant role in their efforts to meet benefit obligations while managing surplus volatility. n Public funds, challenged to meet their long-term benefit obligations by consistently generating required returns, appear to be moving quite quickly to diversify and expand their alternative portfolios (traditionally heavily weighted toward real estate). This effort will be led by a substantial move into absolute return/hedge funds. Additionally, public funds will be one of the strongest drivers of a wide range of newer alternatives e.g., infrastructure and other real assets, portable alpha, net long (13/3), and green/sustainable investments. n E&F investors, generally less constrained in their investment policies than other institutions, are still ratcheting up their alternative allocations to well over a third (36%) of portfolio assets by 21 despite already having the highest participation rates and highest allocations across a majority of alternative asset classes. Some E&Fs even say there is no limit to how high those allocations could go. These investors are looking for opportunistic investments and new ways to diversify their alternative sources of return and to maintain performance of their portfolios, even as the alternatives marketplace becomes more crowded. The different demands, experience levels, resource constraints and organizational challenges facing each investor segment are driving different alternative strategy choices and rates of adoption. The following discussions provide details about how these growth and diversification trends are playing out within specific client segments. A. Corporate pension plans B. Public pension funds C. Endowments & foundations Next generation alternative investing 27

32 ANALYSIS BY investor segment: corporate pension plans Corporate Pension Plans Corporate pension plans anticipate steady increases in alternative allocations, particularly in private equity and absolute return/hedge funds where average allocations across all corporate plan respondents are expected to increase by 21% and 29% respectively, by 21. However, despite this steady progress, corporate plans appear to be more cautious in expanding their alternative allocations than public funds or E&Fs. On average, corporate plans will have the lowest total alternative allocations, and a majority of corporate plan sponsors say that a 2% to 3% overall portfolio allocation to alternative assets is too high (Exhibit 2). In addition, corporate plans show the lowest percentage of current investors increasing allocations to major alternative asset classes (absolute return/hedge funds, private equity, real estate). Exhibit 2: Corporate plans view of a 2% to 3% allocation to alternatives % corporate respondents (6) Too high? 3% Too low? 7% Just right? % Would you say a 2% to 3% asset allocation to alternatives is... Asked of all respondents. Exhibit 3: Corporate plans are shifting to fixed income and alternatives % of assets 1% (6) (62) (6) Alternatives Fixed Income Total Equity We believe this cautious posture is driven primarily by regulatory and accounting reforms (e.g., the Pension Protection Act, SFAS 1, an anticipated Phase II to the FASB pension accounting project, and FSP SFAS 132(R)-a), which address a range of issues, such as: minimum funding requirements, corporate balance sheet impacts, income statement presentation, and disclosures. These on-going reforms will continue to pose a two-pronged challenge for corporate plan sponsors controlling the impact of the plan on corporate financials, while still earning returns sufficient to meet benefit obligations. To address their unique situation, corporate plan sponsors are continuing to decrease traditional equity allocations while significantly increasing fixed income allocations (Exhibit 3). Allocations, however, don t tell the whole story. Corporate plans expect to implement a large shift in duration within their fixed income portfolios (Exhibit ). While duration shifts have been accomplished in the past largely through investing in longer duration cash bonds, nearly half of corporate plans intending to change duration are considering using swaps to synthetically implement the change (Exhibit ). The notable issue raised by these shifts is that corporate plan sponsors are deeply engaged in the process of managing their pension plans funded status volatility in a rapidly changing regulatory environment. We see their more cautious approach to alternatives as related to these challenges. Exhibit : Corporate plans expect to significantly extend fixed income duration Duration, in years 1 All corporate plans (69) Duration 12 months ago Corporate plans extending (2) Public funds (27) Current duration Expected future duration 2 next generation alternative investing

33 ANALYSIS BY investor segment: corporate pension plans How we run the asset side is driven by what is going on in the regulatory environment, condition of our balance sheet and volatility. Corporate plan We are in the process of extending the duration of our fixed income portfolio. We are trying to get the duration of our fixed income portfolio more in line with our underlying plan liabilities. Corporate plan Exhibit : Corporate plans use of futures, swaps and turnkey products to manage duration is likely to increase Shift to longer duration bonds, without changing total fixed income allocation 6 Increase total fixed income allocation Swaps to synthetically change duration 11 Futures to synthetically change duration 21 Turn-key product to change duration, while enhancing alpha (e.g., portable alpha) 17 % who used in the past (2) % likely to use in the future (29) Which one of the following approaches were used to extend the duration of your plan s fixed income assets? Asked of corporate plans whose duration had increased vs. 12 months ago. Which of the following approaches would likely be used to extend the duration of your plan s fixed income assets? Asked of corporate plans considering shortening or extending duration. Next generation alternative investing 29

34 ANALYSIS BY investor segment: corporate pension plans Growth Highlights Even as they wait for clarity and finality on issues such as transparency, reporting, valuation, etc. our findings suggest that corporate plans recognize the benefits of alternatives in improving overall riskadjusted return and managing volatility. Alternatives have played, and will continue to play, a key role in this effort. Significant trends in this investor segment include: n Absolute return/hedge fund strategies are expected to see the highest corporate plan inflows over the next three years with approximately 6% from current investors and % from new investors. Relative to private equity and real estate, these strategies show: a higher number of new investors (Exhibit 6) higher portfolio allocations among current investors (Exhibit 7) and, by 21, across all respondents as well (Exhibit ) a large number of current investors increasing their allocations (Exhibit 9) n Private equity is a more established portion of corporate alternative portfolios with a participation rate roughly % higher than for absolute return/ hedge funds. Most inflows into private equity will be from these existing investors, with relatively few non-investors adding this asset class (Exhibit 6). More than half (2%) of current investors will be increasing private equity allocations (Exhibit 9). In dollar terms, over % of growth is expected to come from these existing investors. A key reason for increasing private equity (in addition to enhancing returns and diversifying the portfolio) is to meet allocation targets (Exhibit 6). n Real estate growth will be moderate among corporate plans and, surprisingly, will see most inflows Exhibit 6: Participation rates percentage of corporate respondents currently investing or planning to invest in Currently invest Plan to invest Absolute return/ hedge funds (7) Private equity (71) Real estate (72) Infrastructure (69) Other real assets (71) Portable alpha (69) Net long equity (13/3) (71) Green, sustainable (67) Exhibit 7: Average allocations across corporate respondents currently investing in Exhibit : Average allocations across all corporate respondents for Average allocations (%) Average allocations (%) Absolute return/ hedge funds (27) (2) Private equity (33) (29) Real estate (3) (31) Absolute return/ hedge funds (2) (7) Private equity () (6) Real estate (2) (7) Based on respondents currently investing in the specified asset class. Average allocations are calculated across all corporate respondents including investors and non-investors in the specified asset class. Respondent base is in parenthesis. 3 next generation alternative investing

35 ANALYSIS BY investor segment: corporate pension plans coming from new investors with relatively few current investors increasing allocations, and some planning to decrease. Ninety-five percent of the estimated dollar growth in corporate real estate investment will come from new investors with average allocations across all corporate respondents expected to remain on par with private equity. Ten percent of corporate plan respondents (a quarter of non-investors) expect to add real estate to their portfolios (Exhibit 6). By comparison, only about 3% of current investors are planning to increase allocations, while 13% plan to decrease (Exhibit 9). Growth across existing and new corporate real estate investors will be lead by international/ global allocations, with the U.S. domestic share of real estate portfolios expected to decline (Exhibit 61). Exhibit 9: Percentage of corporate respondents currently investing in and planning to increase (decrease) allocations to One of the primary reasons cited by those planning to increase allocations to real estate was timing and available opportunities (Exhibit 62). n Infrastructure a long-maturity, high-quality asset presents an opportunity for further return enhancement and diversification with 1% of corporate plans currently investing, a number that is expected to more than double by 21 (Exhibit 6). n Portable alpha is the one area where corporate plans lead other client segments in new investor growth. This asset class will see the sharpest increase in participation rates for corporate plans nearly doubling from 2% to % by 21. These strategies can help address the need for diversified sources of return as allocations to equity decline and bond portfolio allocations increase. Exhibit 6: Corporate plans most frequently cited reasons for increasing private equity allocations 7 Absolute return/ hedge funds (29) Plan to increase 2 Private equity () Plan to decrease Real estate (3) % of corporate respondents citing Increase return Diversification (overall and PE) Meet target allocation Increase alternative allocation Available opportunities Improve risk return Other Based on corporate respondents currently investing in the specified asset class. Exhibit 61: Corporate plans expect further geographic diversification of their real estate and REIT portfolios Expected net change in % of real estate (or REIT) portfolio allocated to Real estate portfolio (39) Global International U.S. domestic Multiple responses accepted. Respondent base = 19. Exhibit 62: Corporate plans most frequently cited reasons for increasing real estate allocations % of corporate respondents citing Diversification risk management Available opportunities (timing/specific) Investment policy Increase return REITs porfolio (1) Inflation hedge Overall increase in alternatives Other Percents represent the difference in the average percentage of the real estate (or REIT) portfolio allocated to the specified region in 21 minus the average allocation in 27. For respondents currently or planning to invest in real estate and/or REITs. Multiple responses accepted. Respondent base = 17. Next generation alternative investing 31

36 ANALYSIS BY investor segment: PUBLIC PENSION FUNDS Public Pension Funds For public funds, the main issue of concern is consistently delivering required returns to meet benefit obligations over the long term. The vast majority of plans (over 7%) are currently underfunded, leading to an even sharper focus on improving risk-adjusted performance of the overall portfolio (Exhibit 63). As a result, public funds are diversifying sources of return to improve overall portfolio performance, and alternatives are playing an increasingly important role. A majority of public funds (6%) now say that an overall alternatives allocation of 2% to 3% is either just right or too low (Exhibit 6). Overall alternative allocations are expected to increase from 1.6% to 1.1% of total portfolio assets between 27 and 21, a gain of 16%. This increase in alternatives is being balanced by a slight decrease in traditional assets, primarily equities (Exhibit 6). In addition, the diversification theme carries through to public funds approach to investing in alternatives: they are becoming increasingly active in asset classes where they have not historically had high participation. Absolute return/hedge funds will see a large percentage of new investors adding these strategies, as will some of the newer asset classes, such as infrastructure, net long (13/3), and green/ sustainable. The goal of improving risk-adjusted portfolio performance is evident across multiple questions in the survey. For example, in both absolute return/hedge funds and private equity which will see the largest dollar inflows from public funds respondents cite performance and diversification among the most important factors driving allocation changes to both of these asset classes (Exhibits 66, 67). Exhibit 63: The majority of public funds are underfunded % of public funds, by funded status year-end 27 Over 1% 96 1% 16% 9% 2% Under % % 9% Respondent base = public funds. Exhibit 6: Public funds view of a 2% to 3% allocation to alternatives % total respondents () Too high? % Too low? 2% Just right? % Would you say a 2% to 3% asset allocation to alternatives is... Asked of all public respondents. Exhibit 6: Public funds are shifting toward alternatives % of assets 1% 6 2 Alternatives Fixed Income Total Equity 2 () (39) 21 (3) 32 next generation alternative investing

37 ANALYSIS BY investor segment: public pension FUNDS My biggest concern [with respect to managing plan assets in the current environment] is hitting our target return with an acceptable level of volatility and risk. Public fund [We are] moving from fixed income to hedge funds, [seeking] more equity-like returns with bond volatility. Public fund Exhibit 66: Public funds most frequently cited reasons for increasing allocations to absolute return/hedge funds % of public fund respondents citing Diversification/ decrease volatility Increase return Improve risk return Available opportunities Other 17 Respondent base = 1. Multiple responses accepted Exhibit 67: Public funds most frequently cited reasons for increasing allocations to private equity % of public fund respondents citing Increase return Meet target allocation Diversification (overall and PE) Improve risk return Available opportunities Overall increase to alternatives Other 1 Respondent base = 2. Multiple responses accepted Next generation alternative investing 33

38 ANALYSIS BY investor segment: PUBLIC PENSION FUNDS Growth Highlights In most alternative categories, public funds will have caught up to, and even surpassed, the allocations of corporate plans by 21. Significant trends in this investor segment include: n Absolute return/hedge funds is the key growth story for public funds, with a majority of inflows (6%) coming from new investors. Participation rates here have increased almost four-fold (to 2%) since our first survey in 2 2 and are expected to exceed that of corporate plans by 21. Over the next three years, relative to other investor segments (see page 1), public funds will show the: highest percentage of new investors in absolute return/hedge funds: 16% of public fund respondents (Exhibit 6) largest allocation increases: +2% among current investors (Exhibit 69), and +9% across all public fund respondents (Exhibit 7). highest percentage of current investors planning to increase allocations: 6% increasing, with none decreasing (Exhibit 71). n Private equity currently shows a high participation rate of 76% (Exhibit 6), but relatively few new investors over the next few years. We expect most private equity inflows from public funds to come from existing investors: overall portfolio allocations should increase by 1% among current investors (Exhibit 69), and by 16% among all public fund respondents (Exhibit 7). n Real estate has been the alternative of choice for most public funds, accounting for an estimated % of alternative portfolios. Participation in this asset class is approaching 1% (Exhibit 6), with portfolio allocations remaining steady, despite current market dislocations (Exhibits 69, 7). The dynamic growth in real estate will come from a strong shift toward international/global allocations, Exhibit 6: Participation rates percentage of public fund respondents currently investing or planning to invest in 76 9 Currently invest Plan to invest 2 Absolute return/ hedge funds () Private equity (6) Real estate () Infrastructure (6) Other real assets (6) Portable alpha () Net long equity (13/3) () Green, sustainable (2) Exhibit 69: Average allocations across public fund respondents currently investing in Exhibit 7: Average allocations across all public fund respondents for Average allocation (%) Average allocation (%) Absolute return/ hedge funds (1) (17) Private equity (2) (1) Real estate (3) (27) Absolute return/ hedge funds (3) (2) Private equity (32) (2) Real estate (3) (2) Based on respondents currently investing in the specified asset class. Average allocations are calculated across all public fund respondents including investors and non-investors in the specified asset class. Respondent base is in parenthesis. 2 JPMorgan Asset Management New Sources of Return Survey, 2. 3 next generation alternative investing

39 ANALYSIS BY investor segment: public pension FUNDS especially in public funds real estate (ex-reits) portfolios (Exhibit 72). n Infrastructure participation among public funds is expected to more than double by 21 (Exhibit 6), potentially reflecting a comfort with, and a need to diversify large real estate holdings. n Green/sustainable investing showed unexpected strength among public funds, with a participation rate expected to nearly triple by 21 (Exhibit 6). We believe that this increase is being driven in part by various state treasurers, state and city controllers and other pension leaders in their efforts to channel more funding toward green investing. 3 Several respondents noted the importance of balancing both social and fiduciary responsibilities in pursuing these investments. n Special issues: GASB accounting for Other Postemployment Benefits (OPEB) is in transition, requiring disclosure of the funded status of OPEB plans, historically funded on a pay-as-you-go basis. At the time of our survey, there was a great deal of uncertainty around whether and to what extent these benefits should be pre-funded, as well as how to invest any assets set aside for funding. It remains to be seen how extensive a role alternatives will play in the investment of these funds (Exhibit 73). Exhibit 71: Percentage of public fund respondents currently investing in and planning to increase (decrease) allocations to 6 Plan to increase 7 Plan to decrease Exhibit 72: Public funds expect further geographic diversification of their real estate and REIT portfolios Expected net change in % of real estate (or REIT) portfolio allocated to Real estate portfolio (32) U.S. domestic International Global Absolute return/ hedge funds (2) Private equity (32) 6 1 Real estate (39) REITs Portfolio (26) Based on public fund respondents currently investing in the specified asset class. Percents represent the difference in the average percentage of the real estate (or REIT) portfolio allocated to the specified region in 21 minus the average allocation in 27. For respondents currently or planning to invest in real estate and/or REITs. Exhibit 73: Will public plan sponsors pre-fund Other Post-employment Benefits (OPEB) liabilities... at what level, and how? % respondents () Unsure 3% Level of OPEB Funding: 27% expect to fund the annual required contribution (ARC) only 1% expect to fully fund liabilities No answer 22% No 26% Yes 22% Construction of OPEB Portfolio: 16% expect to construct OPEB portfolios with the same allocation as their current pension portfolio % expect to construct an OPEB portfolio that is less aggressive than their current pension portfolio 1. Do you plan to fund your OPEB (Other Post-employment Benefits) liability? 2. At what level? 3. And how do/would you construct your OPEB portfolio as compared to your current pension plan? 3 See for example the Investor Network on Climate Risk (INCR) Action Plan, April 2. Next generation alternative investing 3

40 ANALYSIS BY investor segment: ENDOWMENTS & FOUNDATIONS Endowments & foundations For E&F investors, the challenge is to maintain current payouts while protecting the real value of assets. With generally less restrictive investment policies and a longer history with alternatives, E&Fs now have an average allocation to alternatives of 29%, headed toward 36% in 21 (Exhibit 7), approximately double that of public funds and corporate plans. In fact, more than half of E&F respondents say that a 2% to 3% allocation to alternatives is too low (Exhibit 7) and approximately a third believe that there is no natural limit on the extent to which alternatives could displace traditional long-only strategies within the portfolio. In addition to the highest overall commitment in terms of portfolio allocation, E&Fs in general, show the most dynamic approach to alternatives: i.e., the greatest diversification within alternatives and the most opportunistic view of the market. For example, they take an opportunistic view of recent market turmoil, with 6% saying that current credit market dislocations offer a buying opportunity (Exhibit 76). More than % indicate they have taken advantage of shorter-term opportunities (or have the ability to do so) alongside their longer-term strategic investments. Given their strong internal capabilities, E&Fs rely primarily on internal investment staff to implement these opportunistic strategies (Exhibit 77). Based on their high reliance on alternatives, it is not surprising that E&Fs are concerned that high inflows will create overcrowding and impinge not just on their access to top managers, but also their managers access to deal flow and investment opportunity: n Falling returns, overcrowding, and quality managers were cited as the top three concerns for E&Fs with regard to alternatives (Exhibit 7). n In addition to transparency, their top concern regarding absolute return/hedge funds is access to top performing managers (Exhibit 79). Exhibit 7: E&Fs have the highest and fastest growing allocation to alternatives Average allocations across E&F respondents 1% % 6% % 2% Alternatives Fixed Income Total Equity Exhibit 7: Overall, E&Fs feel an allocation of 2% to 3% to alternatives is too low % E&F respondents () Too low? 1% Just right? 3% % 27 (3) 21 () Too high? 11% Would you say a 2% to 3% asset allocation to alternatives is... Asked of all respondents. Exhibit 76: E&Fs generally view recent changes in the structured products and credit insurance markets as an opportunity We think current market conditions offer a buying opportunity We are not particularly concerned about the impact of recent market events on our portfolio We are cautiously optimistic about current and new investment in alternative strategies We have less confidence in existing managers and their ability to generate superior returns Other How do the recent changes in the structured products and credit insurance markets affect your view of alternative investments in your portfolio? Multiple responses accepted Total E&Fs () 1 Endowments (32) Foundations (23) 36 next generation alternative investing

41 ANALYSIS BY investor segment: ENDOWMENTS & FOUNDATIONS Exhibit 77: E&Fs have taken advantage of shorter-term opportunities alongside their longer-term investment horizon % of E&F respondents Flexibility to implement shorter-term ideas? Who implements these ideas? Yes, we have taken advantage of shorter-term opportunities 3 63 In-house investment staff 6 9 Yes, we have flexibility to take advantage of shorter-term opportunities, but have not implemented 9 13 Existing managers 36 No, we do not typically invest this way, other than when our existing managers do so within their current mandate Other good managers who provide the insightful ideas Other 6 6 Total E&Fs (3) Endowments (32) Foundations (21) Other Total E&Fs (1) Endowments (27) Foundations (1) Alongside your long-term investment horizon, do you exercise shorter-term investing flexibility to take advantage of current market opportunities? If you have implemented shorter-term opportunities, or have the flexibility to do so, who has implemented/is likely to implement these ideas? Multiple responses accepted. Exhibit 7: Greatest concerns among E&Fs regarding alternatives and the management of their portfolios % of E&F respondents citing Falling returns/performance Overcrowding of space Quality managers/tools Transparency Liquidity Risk No concerns Valuations Staffing/oversight capabilities Volatility Blow up/melt down Fees Global recession Accounting concerns Counterparty relationship Other As alternative investments become more popular, what is your greatest concern with respect to managing your plan assets/portfolio in the current market environment? Multiple responses accepted. Respondent base = 6. Exhibit 79: Transparency is the primary challenge E&Fs face when investing in absolute return/hedge funds % of E&F respondents citing Transparency Access to top-performing managers 3 6 Resources and expertise 2 Liquidity 19 High fee arrangements Headline risk/ reputation risk Board approval What are the top three challenges you face when considering investments in absolute return or hedge fund strategies? Respondent base =. Multiple responses accepted. Next generation alternative investing 37

42 ANALYSIS BY investor segment: ENDOWMENTS & FOUNDATIONS Growth Highlights Despite overall high participation rates and high allocations, E&F investors continue to set the pace by increasing their exposure to alternatives nearly acrossthe-board, in well-established as well as newer alternative categories. Significant trends in the E&F investor segment include: n Real estate will be a dynamic asset class for E&Fs a somewhat surprising result, given that this asset class has not been an emphasis for E&Fs historically, and they have dedicated a relatively small share of their alternative portfolios to real estate. On the other hand, this recent attention to real estate is not so surprising when one takes into account their opportunistic approach. Over the next several years, real estate is expected to show: a large jump in new investors (13% of E&F respondents) with E&Fs participation rate reaching 92% by 21 (Exhibit ) nearly equaling the participation rate of public funds allocation increases (+26% among current investors; and +3% across all E&F respondents) that are the largest of any investor group (Exhibits 1, 2) a majority of existing E&F investors (6%) increasing their allocations (Exhibit 3) the highest percentage of any investor group growth in large part focused on non-u.s. assets, with a declining share of real estate and REIT portfolios allocated to the United States (Exhibit ) n Private equity has nearly a 1% participation rate among E&Fs (Exhibit ). Nevertheless it is projected to be the fastest growing major alternative asset class for E&Fs over the next three years, with a surprisingly large increase in overall portfolio allocation: +2% across current private equity investors as well as across all E&F respondents (Exhibits 1, 2). Exhibit : Participation rates percentage of E&F respondents currently investing or planning to invest in Currently invest Plan to invest Absolute return/ hedge funds (3) Private equity () Real estate (3) Infrastructure (29) Other real assets (1) Portable alpha (7) 6 Net long equity (13/3) (9) 27 6 Green, sustainable (33) Exhibit 1: Average allocations across E&F respondents currently investing in Exhibit 2: Average allocations across all E&F respondents for Average allocations (%) Average allocations (%) Absolute return/ hedge funds (37) (3) Private equity (3) (33) Real estate (29) (27) Absolute return/ hedge funds () () Private equity () (3) Real estate () (3) Based on respondents currently investing in the specified asset class. Average allocations are calculated across all E&F respondents including investors and non-investors in the specified asset class. Respondent base is in parenthesis. 3 next generation alternative investing

43 ANALYSIS BY investor segment: ENDOWMENTS & FOUNDATIONS In addition, E&Fs are taking a much more aggressive posture with respect to geographic diversification: They are much more likely to invest in Asia/ Pacific, emerging markets, and even global strategies than other investor segments (Exhibit ). n Absolute return/hedge fund strategies are expected to see continued growth, even though the participation rate among E&Fs is 9% (Exhibit ), and these strategies already represent nearly half of E&F s alternative portfolio dollar allocations. Overall portfolio allocations are expected to increase a healthy 16% by 21 across both existing investors and all E&F respondents (Exhibits 1, 2). n Infrastructure participation among E&Fs stands at 21% (Exhibit ) approximately double that of corporate and public pension plans. But their interest is slowing somewhat, with relatively few new investors planning to add this asset class in the near term. n Portable alpha should see a steady increase in usage among E&Fs increasing by approximately % by 21 as these investors seek to further diversify their alpha sources (Exhibit ). n Other real assets, valued by these investors for their diversification and inflation-hedging benefits, are another area where E&Fs lead. Their participation in this asset class is expected to rise to more than % by 21, with a relatively large portion of non-investors (approximately 3%) adding this asset class (Exhibit ). In addition, a large percentage of existing investors plan to increase allocations. n Green/sustainable investing is yet another area where E&Fs played the role of first movers with a participation rate (27%) that is more than double public funds and triple corporate plans (Exhibit ). But it is another area in which E&Fs appear to be taking a breather, with few non-investors looking to add this asset class. Exhibit 3: Percentage of E&F respondents currently investing in and planning to increase (decrease) allocations to Plan to increase Plan to decrease Absolute return/ hedge funds () 61 Private equity (6) 6 Real estate () [We are] looking for alpha and taking advantage of global opportunities and growth [in real estate]. Foundation Based on E&F respondents currently investing in the specified asset class. Exhibit : E&Fs expect further geographic diversification of their real estate and REIT portfolios Expected net change in % of real estate (or REIT) portfolio allocated to Real estate, portfolio (29) REITs portfolio (16) Percents represent the difference in the average percentage of the real estate (or REIT) portfolio allocated to the specified region in 21 minus the average allocation in 27. For respondents currently or planning to invest in real estate and/or REITs. 1. U.S. domestic International Global 9. Exhibit : Percent currently investing or planning to invest in private equity in... Europe Asia/Pacific International developed Global Emerging markets Currently investing Planning to Corporate plans () Public funds (3) E&Fs (2) Next generation alternative investing 39

44 Conclusion It appears that the anticipated risk-adjusted returns, diversification benefits, and high satisfaction rates with alternatives will continue to support their growth across the board in all investor segments and alternative asset classes outweighing investors concerns about overcrowding and its potential impact on performance. Market dislocations have not dissuaded institutions from their program of using alternatives to add sources of uncorrelated return and improve riskadjusted portfolio performance. In fact, many investors see niches of opportunity and are adjusting their alternative asset strategies accordingly. What they are not doing in any substantial way is pulling back. This survey indicates that alternatives, used in the right way, are enabling investors to better tailor investment strategies to address their myriad financial and investment concerns e.g., controlling volatility, boosting returns, or hedging inflation. In this regard, alternative assets have indeed become an essential part of the portfolio, and the survey data suggest that as investors comfort levels rise, so do their overall alternative allocations as well as their diversification within alternative asset classes. Continuous innovation will be required to meet the needs and appetites of institutional investors as they further integrate these strategies. They will require an expanding menu of high-quality, uncorrelated alpha sources from markets around the world. No doubt, just as our current survey includes strategies (e.g., equity 13/3, infrastructure, green investing) not incorporated in our earlier surveys, we expect our future research on investment trends to cover strategies, structures, investment themes and frameworks now only on the drawing board or perhaps not yet conceived. For asset managers, this growth will pose a challenge. Investors will demand an increase in the availability and diversification of alternative offerings challenging managers to maintain quality and performance standards even while significantly increasing capacity. Some are likely to demand packaging and programs that simplify access, portfolio construction, risk management, and due diligence. Others will look to form strategic partnerships with their asset managers to tap into best ideas and develop unique, customized solutions for their investment challenges. They are also likely to require more assistance in educating themselves and their boards, and in effectively incorporating alternatives into their portfolio strategies. Thus far the industry has proven itself up to the task, with continuous innovation in nearly every aspect of alternative investing. Over the next several years, however, asset managers will distinguish themselves by delivering the highest levels of thought leadership and client service that ultimately serve to meet or exceed clients performance expectations for both risk and return. next generation alternative investing

45 partial list of Participants JPMorgan Asset Management wishes to thank all 191 institutions who participated in our survey. The following participating institutions generously agreed to have their names listed in this report. ABB Incorporated Abbott Laboratories Air Products and Chemicals, Incorporated Alliant Techsystems Incorporated American Airlines, Incorporated American Electric Power Company, Incorporated American Red Cross Ashland, Incorporated Avaya Incorporated B&W Technical Services Y12, L.L.C. Baltimore County Employees Retirement System Battelle Memorial Institute Baylor College of Medicine Baylor Health Care System Baylor University Boise Cascade, L.L.C. BP North America Incorporated Briggs & Stratton Corporation Carnegie Mellon University Casey Family Programs Charles Stewart Mott Foundation Citizens Communications Company City of Birmingham Retirement and Relief System City of Hartford Municipal Employees Retirement Fund City of Los Angeles Fire and Police Pension System City of Memphis Retirement System City of Miami Fire Fighters and Police Officers Retirement Trust Colgate-Palmolive Company Conrad N. Hilton Foundation Consolidated Edison Company of New York, Incorporated Corning Incorporated Cox Enterprises, Incorporated Cummins Incorporated Dana Corporation Daniels Fund Denver Employees Retirement Plan Deseret Mutual Benefit Administrators Directors Guild of America District of Columbia Retirement Board DTE Energy Company Duke Energy Corporation Duke University Eastman Chemical Company Eaton Corporation El Paso Corporation Emory University Energy Future Holdings Corporation (formerly TXU Corporation) Evanston Northwestern Healthcare Ewing Marion Kauffman Foundation Florida State University Foundation, Incorporated Ford Motor Company FPL Group, Incorporated Geisinger Health System GenCorp Georgia-Pacific LLC Greater Kansas City Community Foundation Grinnell College GuideStone Financial Resources of the Southern Baptist Convention Houston Police Officers Pension System Indiana State Teachers Retirement Fund Inter-American Development Bank Next generation alternative investing 1

46 International Brotherhood of Electrical Workers Local 26 Jacksonville Police and Fire Pension Fund John Hancock Financial Services Incorporated Johnson Controls, Incorporated Lehigh University Lifespan Corporation Lockheed Martin Corporation Los Angeles City Employees Retirement System Los Angeles County Employees Retirement Association Louisiana School Employees Retirement System Lumina Foundation for Education Maine State Retirement System Meadows Foundation, Incorporated Michelin North America, Incorporated Michigan Catholic Conference Minnesota State Board of Investment New Mexico Educational Retirement Board New York-Presbyterian Fund, Incorporated North Dakota State Land Department Novartis Corporation NSTAR Ohio State University Oklahoma Firefighters Pension and Retirement System Omaha School Employees Retirement System Pennsylvania Municipal Retirement System PPG Industries, Incorporated PPL Corporation Public Employees Retirement Association of New Mexico Public Employees Retirement System of Mississippi Public School & Education Employee Retirement Systems of Missouri Public School Teachers Pension & Retirement Fund of Chicago Sacramento County Employees Retirement System San Antonio Fire & Police Pension Fund San Joaquin County Employees Retirement Association School Employees Retirement System of Ohio Sempra Energy Shelby County Retirement System Shell Oil Company Smith College Smithsonian Institution South Carolina Retirement Systems Southern California Edison Company Southern Ute Indian Tribe Tallahassee Employees Retirement Fund Texas A&M Foundation Texas Scottish Rite Hospital for Children The Aerospace Corporation The Harry and Jeanette Weinberg Foundation, Incorporated The J. Paul Getty Trust The McGraw-Hill Companies The McKnight Foundation The Nature Conservancy The Ohio Police & Fire Pension Fund The Rotary Foundation of Rotary International The Samuel Roberts Noble Foundation, Incorporated The UCLA Foundation Tulare County Employees Retirement Association UNITE HERE National Retirement Fund United Farm Workers Juan De La Cruz Pension Plan United Food & Commercial Workers Union - Pension Fund, Atlanta United Food and Commercial Workers Union Local 711 University of Alabama University of Arkansas Foundation University of California University of Chicago University of Delaware University of Florida Foundation, Incorporated University of Rochester Virginia Retirement System Washington Mutual, Incorporated Wyoming Permanent Funds 2 next generation alternative investing

47 IMPORTANT DISCLAIMER This document is intended solely to report on various investment views held by JPMorgan Asset Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. This material contains certain projections and assumptions with regard to the opportunities described therein. This material must not be relied upon as advice or interpreted as a recommendation by JPMorgan Asset Management that the opportunities are a suitable investment for any recipient of this information. Investors may experience results that differ materially from any information shown. The return on the opportunities will depend on the actual investments made and the economic, interest rate and regulatory environment during the relevant period. Infrastructure investments may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrowers. The risk of investing in foreign countries is heightened when investing in emerging markets. In addition, the small size of securities markets and the low trading volume may lead to a lack of liquidity, which leads to increased volatility. Also, emerging markets may not provide adequate legal protection for private or foreign investment or private property. Please note that investments in offshore markets are subject to special currency, political, and economic risks. Exchange rates may cause the value of underlying overseas investments to go down or up. Investments in certain markets may be more volatile than other markets and the risk to your capital is therefore greater. Also, the economic and political situations may be more volatile than in established economies and these may adversely influence the value of the investments made. JPMorgan Asset Management does not make any express or implied representation or warranty as to the accuracy or completeness of the information contained herein, and expressly disclaims any and all liability that may be based upon or relate to such information, or any errors therein or omissions there from. This material must not be relied upon by you in making a decision as to whether to invest in the opportunities described herein. Prospective investors should conduct their own investigation and analysis (including, without limitation, their consideration and review of the analyses referred to herein) and make an assessment of the opportunity independently and without reliance on this material or JPMorgan Asset Management. In addition, prospective investors are strongly urged to consult their own legal counsel and financial, accounting, regulatory and tax advisers regarding the implications for them of investing in these opportunities. JPMorgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., JPMorgan Investment Advisors Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc. JPMorgan Chase & Co. July 2 IMWP_ALT SURVEY

48 JPMorgan Asset Management 2 Park Avenue New York, NY 1167 jpmorgan.com/insight