Are alternatives mainstream?

Transcription

1 JPMorgan Asset Management November 2007 The Alternative Asset Survey 2007 Are alternatives mainstream? European Survey

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3 The European Alternative Asset Survey Foreword In 2003 JPMorgan Asset Management published its first European Alternative Investment Strategies Survey. At the time, we looked to ascertain the extent to which institutional investors across Europe were embracing new sources of return outside of traditional equities and fixed income. Given that investors were grappling with the effects of a three-year bear market in equities, it was an interesting time to gauge intentions. We discovered that, while institutions were considering alternative asset classes partly as a means of spreading investment risk, the desire for higher returns was the real driving force behind a willingness to consider asset classes such as private equity and hedge funds. We concluded that, if pension funds and life insurance companies were to transform investment intentions into actions, flows of institutional capital into these asset classes would become significant. So four years on, what has happened? 1 While investors have clearly benefited from the effects of stronger equity markets since 2003, investment levels in alternative asset classes have risen albeit modestly in some cases. Additionally, institutions are still keen to find ways to diversify their sources of return and are more mindful than ever of the need to explore new strategies in order to manage the gap between assets and liabilities. Who took part? June and July, more than 280 leading institutional investors across 12 European countries contributed to The European Alternative Asset Survey 2007, representing?1.9 trillion ( 1.3 trillion 2 ) of institutional assets. We asked them about their current attitudes towards established alternative asset classes such as real estate, hedge funds and private equity as well as towards one of the newest, infrastructure. We would like to thank everyone who has taken part Following the challenges equity and debt markets have faced during the credit crisis this summer, institutional investors are keenly aware of the need to ensure skillful risk management while still retaining strong investment return potential. We believe alternative asset classes have a vital role to play in achieving this complex balancing act. The following pages show to what extent Europe s institutional investors agree with us. Jens H. Schmitt Head of Institutional Business Continental Europe JPMorgan Asset Management Peter Ball Head of UK Institutional Business JPMorgan Asset Management Karin Franceries Head of Client Solutions Team JPMorgan Asset Management 1 Please note that all figures stated in this study relate only to answers given by our study participants with no market extrapolation. 2 The conversion rate between EUR and GBP is as at 31 December 2006.

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5 The European Alternative Asset Survey Executive summary 5 Key findings by region 6 Key findings by asset class 10 About the survey 12 Part One Overview of trends in alternative investment Incidence of investment 2. Asset allocation 3. Experience of investing in alternatives 4. Looking ahead Part Two Analysis by asset class 17 Real estate Allocation of current investors 2. Return expectations 3. Risk perceptions 4. Intentions and expectations Hedge funds Allocation of current investors 2. Return expectations 3. Risk perceptions 4. Intentions and expectations Private equity Allocation of current investors 2. Return expectations 3. Risk perceptions 4. Intentions and expectations Infrastructure and other alternatives Classification of infrastructure 2. Allocation of current investors 3. Return expectations 4. Intentions and expectations 5. Other alternative assets Conclusion 35

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7 The European Alternative Asset Survey Executive summary Allocation: investment levels rise modestly, except for surge in hedge funds Investment levels into alternative assets among European institutions have risen modestly since 2003, with alternatives representing 13% of the average portfolio. Of those institutions surveyed, 25% are invested in all three main alternative asset classes real estate, private equity and hedge funds. Levels of investment in real estate and private equity have remained broadly unchanged in most European markets, except in the Nordic region, where allocation to private equity has increased significantly. However, there has been a strong increase in hedge fund investment across Europe, where both incidence and levels of investment have doubled. Perceptions: ambivalence about risk Respondents show a good understanding of alternatives, but are ambivalent about risk. Their concerns about the risks associated with investing in alternatives do not prevent them from investing. However, they remain cautious about the outlook for these asset classes, with their expected future returns largely in line with or lower than the returns they have achieved to date. The desire for diversification is the key motivation for investing in alternatives. Respondents are well diversified within each alternative asset class. They are keen to spread their investments among a number of fund managers and favour highly-diversified investment vehicles such as multi-strategy and fund of fund options. Nevertheless, a large majority of respondents consider an allocation of 50% or more to alternative asset classes to be too risky. Participation: Investors and non-investors are polarised Respondents have greater conviction in their views about alternatives than in There is now a marked division between investors and non-investors. Those who have already invested are keen to increase their allocations significantly while the majority of institutions that have not invested appear to have little interest in doing so. By asset class, current hedge fund investors have the most appetite to increase their allocation, with 63% intending to do so, while 50% of private equity investors and 30% of real estate investors plan to increase their stake. Of those not planning to raise their allocation, the majority intend to maintain their current exposure. Very few investors are planning to reduce their overall exposure to alternatives. Preferred strategies: Investors looking for diversification by strategy and manager The generally cautious approach of respondents to alternative investments is reflected in their preferred strategies. Respondents favour core or core plus strategies for real estate, while their appetite for diversification is reflected in their preference for multi-strategy hedge funds and private equity funds of funds. Respondents strongly favour vehicles domiciled in their own country or elsewhere in Europe. Future investment plans: More than?100bn ( 65bn) inflow Our respondents intend to invest a further?103.6bn ( 69.7bn) into alternative assets in the next two to four years. It is important to note that this figure relates only to those who have responded to our survey, with no market extrapolation. Intended levels of investment among survey respondents over the next two to four years are as follows:?27.2bn in real estate ( 18.3bn)?17.1bn in hedge funds ( 11.5bn)?16.3bn in private equity ( 11bn)?14.5bn in infrastructure ( 9.8bn)?28.4bn in other alternatives (e.g. commodities and currency) ( 19.1bn)

8 6 The European Alternative Asset Survey 2007 Key findings by region* Belgium/Netherlands 44 pension funds interviewed (8 in Belgium; 36 in Netherlands), with?459bn ( 309bn) of assets under management; Region with the greatest increase since 2003 in the proportion of respondents investing in alternatives (89% for real estate, 44% for hedge funds, and 48% for private equity); Average allocation of current investors: 9.1% real estate, 4.3% hedge funds, 3.1% private equity, and 1.8% infrastructure; Appetite for new investment in real estate and private equity in line with European peers but below for hedge funds; Higher than average interest in infrastructure and in domestic private equity; Estimated future allocation of investors: 9.9% real estate, 5.2% hedge funds, 4.7% private equity, 3.3% infrastructure. This would result in approximately?23bn ( 15.5bn) new investments over the next two to three years (for respondents disclosing their intentions). Average allocation of investors Current allocation Percentage % 9.9% Planned allocation over next 2-3 years 5 4.3% 5.2% 3.1% 4.7% 3.3% 1.8% 0 Real estate Hedge funds Private equity Infrastructure France 15 investors interviewed, with?195bn ( 131bn) of assets under management; As in 2003, high proportion of respondents investing across all three key alternatives (73% for real estate, hedge funds and private equity); but recorded one of the lowest average allocations for each asset class; Average allocation of current investors: 4.5% real estate, 2.7% hedge funds, 1.2% private equity, and 0.1% infrastructure; Given the high allocation to fixed income among French investors, alternative investments are used primarily to increase potential returns (mentioned by 67% of respondents for real estate, 50% for hedge funds and 80% for private equity); Estimated future allocation of investors: 7.4% real estate, 5.9% hedge funds, 3.8% private equity, and 0.9% infrastructure. This would result in approximately?10bn ( 6.5bn) new investments over the next two to four years (for respondents disclosing their intentions). Average allocation of investors Current allocation Percentage % 7.4% Real estate 2.7% 5.9% 1.2% 3.8% Planned allocation over next 2-4 years 0.1% 0.9% Hedge funds Private equity Infrastructure *The expected results have been estimated based on intentions expressed by our survey respondents. They should not be considered market estimates.

9 The European Alternative Asset Survey Germany/Austria 21 investors interviewed (17 in Germany, 4 in Austria), with?352bn ( 236bn) of assets under management; region of respondents with largest AUM; Proportion of respondents investing in hedge funds has doubled since 2003 from 31% to 67%, but proportion of investors in real estate (75%) and private equity (48%) is unchanged; Average allocation of current investors: 8.0% real estate, 4.6% hedge funds, 1.2% private equity, and 1.0% infrastructure; Strongest appetite to increase allocation to alternative assets: those looking to increase allocation include 69% of real estate investors (vs. 30% for Europe as a whole), 93% of hedge fund investors (vs. 63% for Europe) and 90% of private equity investors (vs. 50% for Europe); Primarily looking to alternatives as a means of diversification from traditional asset classes (cited by 83% of real estate, 81% of hedge fund and 45% of private equity investors) rather than as a source of higher returns; Estimated future allocation of investors: 11.0% real estate, 7.0% hedge funds, 3.6% private equity, and 3.0% infrastructure. This would result in approximately?16bn ( 11bn) new investments over the next two to five years (for respondents disclosing their intentions). Average allocation of investors Current allocation Percentage % 11.0% 7.0% Planned allocation over next 2-5 years 5 0 Real estate 4.6% 3.6% 3.0% 1.2% 1.0% Hedge funds Private equity Infrastructure Italy 21 investors interviewed with?82bn ( 55bn) of assets under management; Proportion of respondents investing in alternatives unchanged since 2003, with the lowest incidence of private equity investment (71% of Italian respondents hold no private equity); Average allocation of current investors: 20.0% real estate, 6.2% hedge funds, 2.6% private equity, and 0% infrastructure; Has the highest return expectations for both hedge funds (13.4% vs. 8.0% in Europe) and private equity (19.7% vs. 12.2% on average). However, Italy is the only country significantly concerned about the level of volatility within these asset classes; Estimated future allocation of investors: 13.7% real estate, 10.2% hedge funds, 6.5% private equity, and 4.1% infrastructure. This would result in approximately?6bn ( 4bn) in new investments over the next one to three years (for respondents disclosing their intentions). Average allocation of investors % Current allocation Percentage % 10.2% Planned allocation over next 1-3 years 6.2% 6.5% 5 2.6% 4.1% 0 Real estate 0% Hedge funds Private equity Infrastructure

10 8 The European Alternative Asset Survey 2007 Nordics 45 investors interviewed (19 in Denmark, 12 in Sweden, 9 in Finland, 5 in Norway) with?436bn ( 294bn) of assets under management; Since 2003, the region has seen a boom in alternative asset investment, with the highest private equity allocation in Europe; only region where private equity is more popular than real estate; Current proportion of respondents investing in real estate 73%, in hedge funds 50%, and in private equity 84%; Average allocation of current investors: 7.8% real estate, 5.9% hedge funds, 8.6% private equity, and 1.3% infrastructure; In contrast to the rest of Europe, investment in real estate and hedge funds is driven by the search for higher returns rather than diversification; Estimated future allocation of investors: 10.5% real estate, 7.1% hedge funds, 9.5% private equity, and 4.1% infrastructure. This would result in approximately?32bn ( 22bn) new investments over the next two to four years (for respondents disclosing their intentions). Average allocation of current investors Current allocation Percentage % 10.5% 5.9% 7.1% 8.6% 9.5% Planned allocation over next 2-4 years 4.1% 1.3% 0 Real estate Hedge funds Private equity Infrastructure Switzerland 24 investors interviewed with?52bn ( 35bn) of assets under management; Highest proportion of respondents invested in real estate (92%), with above-average incidence of private equity (62%) and hedge funds (62%); Average allocation of current investors: 19.7% real estate, 5.1% hedge funds, 2.7% private equity, and 0.8% infrastructure; Highest average exposure to real estate, with steady but cautious growth in exposure to hedge funds and private equity; Apparent strong interest in infrastructure recording the highest planned exposure to this new asset class of all European regions (4.3%); Estimated future allocation of investors: 20.3% real estate, 5.6% hedge funds, 4.4% private equity, and 4.3% infrastructure. This would result in approximately?2bn ( 1.3bn) new investments over the next two to four years (for respondents disclosing their intentions). Average allocation of investors % 20.3% Current allocation Percentage Planned allocation over next 2-4 years 5 5.1% 5.6% 2.7% 4.4% 4.3% 0 Real estate 0.8% Hedge funds Private equity Infrastructure

11 The European Alternative Asset Survey UK 112 investors interviewed with?317bn ( 214bn) of assets under management; Lowest proportion of respondents invested in hedge funds (23% vs. 42% European average) and the second lowest incidence of private equity investing (40% vs. 51% European average); Average allocation of current investors: 8.5% real estate; 6.1% hedge funds; 3.0% private equity; and 1.9% infrastructure; Given high equity allocation of UK pension funds, alternative investments are needed to stabilise returns through diversification (mentioned by 84% of respondents for real estate, 67% for hedge funds and 48% for private equity); Estimated future allocation of investors: 10.7% real estate, 6.9% hedge funds, 5.8% private equity, and 3.6% infrastructure. This would result in approximately?16bn ( 11bn) new investments over the next two to four years (for respondents disclosing their intentions). Average allocation of investors Current allocation Percentage % 10.7% 6.1% 6.9% 3.0% 5.8% Planned allocation over next 2-4 years 1.9% 3.6% 0 Real estate Hedge funds Private equity Infrastructure

12 10 The European Alternative Asset Survey 2007 Key findings by asset class Real estate Most familiar and most established asset class amongst alternatives; Core asset class with 10% average allocation and 74% of respondents invested; 30% of current investors intend to increase their real estate exposure over 2.9 years on average; Main reason for investing: diversification (61%); Investment focus is on core/core-plus real estate strategies; Only 15% of current non-investors (i.e. 4% of all respondents) intend to invest; 39% of investors plan on restructuring their investments towards more indirect real estate investments, rather than direct investment in bricks and mortar; Almost two-thirds of respondents plan to increase exposure to international real estate; Annualised returns expected to decline from an average of 12.2% 1 to 8.1% 2 p.a.. Real estate respondents breakdown Potential investors, not investing today 4% Convinced noninvestors, current and future 22% Current investors, will remain invested 74% Hedge funds Fastest growing asset class since 2003; 5% average allocation for current investors and 42% of respondents invested; 63% of current investors intend to increase their hedge funds exposure over 2.2 years on average; Main reason for investing in this asset class: diversification (53%); Investment focus is on local/european-domiciled multi-strategy funds of funds; Only 12% of current non-investors (i.e. 7% of all respondents) intend to invest; Perceived as the most risky alternative asset class among both investors and non-investors; Annualised returns expected to decline from 8.9% 1 to 8.0% 2 p.a., resulting in the highest anticipated Sharpe Ratio 3 (1.06) of the three key alternative asset classes. Hedge funds respondents breakdown Convinced noninvestors, current and future 51% Current investors, will remain invested 42% Potential investors, not investing today 7% 1 Realised annual return from investment inception 2 Expected long-term annual return 3 The Sharpe Ratio is a measure of return achieved for the level of risk taken. It is calculated by deducting the investment return from a risk-free rate of return (eg. government bonds/cash) and dividing by the level of volatility. The higher a Sharpe Ratio for an investment, the higher the return achieved per unit of risk taken i.e. an attractive risk-adjusted return.

13 The European Alternative Asset Survey Private equity Modest growth in allocation since 2003, except for Nordics where allocation surged 4% average allocation for current investors and 51% of respondents invested; 51% of current investors have less than 40% of their commitment invested (due to time lag); 50% of current investors intend to increase their exposure to private equity over 3.4 years on average; Investment focus is on local/european-domiciled funds of funds; Main reasons for investing: higher returns (55%) and diversification (40%); Only 9% of current non-investors (i.e. 5% of all respondents) intend to invest; Investors have significant concerns regarding the practical risks involved in private equity; Annualised returns expected to remain stable at 12% 1,2 p.a.. Private equity respondents breakdown Convinced noninvestors, current and future 44% Potential investors, not investing today 5% Current investors, will remain invested 51% Infrastructure Most respondents consider infrastructure to be an asset class of its own, rather than a sub-sector of private equity or real estate;?15bn ( 10.1bn) already invested in infrastructure by survey respondents with a further?14.5bn ( 9.8bn) planned by 2011; An average strategic allocation of 4% to this relatively new asset class is anticipated in the next three years by respondents across Europe; Dutch, Nordic and Italian investors show the strongest interest in infrastructure, looking to increase exposure to more than 4% over the next two to four years; Expected return for the asset class is 10.0% 2. Other alternative assets?28.4bn ( 19.1bn) planned investment in other alternative assets ; Commodities most frequently cited as a favoured alternative asset class, particularly among Belgian/Dutch and Italian respondents; Currency also seems to have strong future investment potential, particularly in the UK, with an interest from 46% of respondents who intend to invest in other alternative. 1 Realised annual return from investment inception 2 Expected long-term annual return 3 The Sharpe Ratio is a measure of return achieved for the level of risk taken. It is calculated by deducting the investment return from a risk-free rate of return (e.g. government bonds/cash) and dividing by the level of volatility. The higher a Sharpe Ratio for an investment, the higher the return achieved per unit of risk taken i.e. an attractive risk-adjusted return.

14 12 The European Alternative Asset Survey 2007 About the survey The European Alternative Asset Survey 2007 intends to gauge attitudes to and levels of investment in alternative asset classes among Europe s institutional investors. For the purposes of the survey, we primarily defined alternative assets as real estate, hedge funds and private equity with a brief look at other classes, such as infrastructure, commodities and currency. In June and July 2007, we interviewed 282 institutions across 12 European countries, which have been split into seven regions (see Table 1). Collectively, this survey samples accounts for close to?1.9 trillion ( 1.3 trillion) of institutional assets. Where we asked about existing investments, the data provided is as at 31 December Table 1 Regions and number of institutions surveyed Assets under management (?bn) % of total Sample % of total of respondents respondents Region size respondents as at AUM Belgium/Netherlands % 459 ( 309bn) 24% France 15 5% 195 ( 131bn) 10% Germany/Austria2 21 7% 352 ( 236bn) 19% Italy 21 7% 82 ( 55bn) 4% Nordics % 436 ( 294bn) 23% Switzerland 24 9% 52 ( 35bn) 3% United Kingdom % 317 ( 214bn) 17% Total % 1,892 ( 1.275bn) 100% 85% of respondents were pension funds. The remainder were large insurance companies, asset managers and banks. Comparisons with 2003 relate to our European Alternative Investment Strategies Survey Findings from the 2003 survey may be viewed at respondents in Belgium; 36 in the Netherlands respondents in Germany; 4 in Austria respondents in Denmark; 12 in Sweden; 9 in Finland and 5 in Norway.

15 The European Alternative Asset Survey Part One Overview of trends in alternative investment 1. Incidence of investment Since our last survey into alternative investing in 2003, the incidence of investment in real estate and private equity has remained broadly stable among the institutions surveyed. However, the percentage of institutions investing in hedge funds has almost doubled to 42% (see Table 2). Only 11% of institutions surveyed have no exposure whatsoever to any of these three major alternative asset classes. Table 2 Incidence of investment % of respondents invested Real estate 70% 74% Hedge funds 22% 42% Private equity 48% 51% In the case of hedge funds, the incidence of investment does not appear to depend on the size of the institution, with small and large institutions having a similar likelihood of investing. This is not the case for real estate or private equity, where smaller investors are less likely to invest, as Table 3 shows below. Table 3 Incidence of investment by size of institution % of institutions invested Size of institution Real Hedge Private (by AUM) estate funds equity <?1bn ( 0.67bn) 58% 53% 37%?1bn ( 0.67bn)?3bn ( 2.02bn) 78% 33% 45%?3bn ( 2.02bn)?10bn ( 6.74bn) 80% 41% 72% >?10bn ( 6.74bn) 80% 52% 56% 2. Asset allocation As mentioned above, hedge funds are the only one of the three main alternative asset classes to have seen a significant increase in the numbers of institutions investing since our last survey in It is also the only asset class to see any significant increase in the average levels of portfolio exposure that institutions are choosing to allocate to it - rising from 3% to 5%, as Table 4 shows below. This means that, for the first time, the average exposure to hedge funds exceeds the average exposure to private equity among European institutional investors. Beyond these average European figures are some significant regional shifts. For example private equity exposure has only risen marginally across Europe as a whole. However, in the Nordic region, allocation to private equity has risen quite dramatically from 3% to 8.6%. Table 4 Average allocation to alternative asset classes Number of Average Average respondents allocation allocation invested per investor per investor Real estate % 10.9*% Hedge funds % 2.5% Private equity % 3.3% Other % n.a. *Europe excluding UK

16 14 The European Alternative Asset Survey Experience of investing in alternatives To assess whether institutional investors feel well-equipped to make decisions about investing in alternative assets, we examined how long they had been invested in each asset class, the resources they dedicated to alternatives and their reliance on external managers and consultants. Length of investment We asked institutions how long they had been investing in each asset class. Unsurprisingly, real estate is the longest established asset class reflected in the high levels of exposure among institutions while infrastructure is the newest. Respondents were relatively new to hedge funds, with 68% having invested for less than five years. More than half (51%) of respondents claim they have been investing in private equity for between five and ten years however, as we shall see on the following pages, exposure to this asset class still remains modest. Resources dedicated to alternatives Table 5 Resources dedicated to alternative investing Sample size Dedicated investment professional(s) 30% 27% 37% 14% 35% 4% 7% 19% Part of job for some investment professionals 39% 64% 43% 38% 60% 66% 26% 41% Internal captive asset manager 0% 0% 10% 0% 0% 0% 0% 1% Outsourced 24% 9% 10% 38% 5% 30% 60% 35% No internal nor consultants 7% 0% 0% 10% 0% 0% 7% 4% Overall, the majority of institutions surveyed had staff working on alternative investing in some capacity. This was consistent across Europe, with the exception of the UK where 60% of institutions draw on third-party investment consultants for advice. Despite their relatively low allocation to alternatives (see page 7), German/Austrian respondents were the most likely to employ investment professionals specifically dedicated to alternative investing. We would conclude this is because institutions in this region are among the largest in terms of total AUM, and the number of investment professionals employed appears to correlate more closely to the size of investor rather than the portfolio exposure specifically allocated to alternative investments. Number of externally managed funds Table 6 Average number of externally managed funds held per institution Europe Sample size 116 Real estate 6 Hedge funds 7 Private equity 14 Infrastructure 2 Although average exposure to alternative asset classes is quite low, respondents tend to hold a high number of funds in order to achieve exposure. The most compelling example is private equity where investors invest in an average of 14 funds.

17 The European Alternative Asset Survey This reflects the highly segmented nature of private equity (where the investment opportunity set is specialised on specific development stages of companies, specific regional exposure or specific industry) and the fact that it may only be possible to make small investments into a fund at a time. In addition, private equity investors are often keen to stagger investment over a period of years. This high level of diversification underlines the fragmented nature of alternative investing. It also raises a question of governance as to how many institutions have sufficient expertise and resources to ensure proper monitoring of managers and holdings. 4. Looking ahead Perceptions of alternative investing To assess how far investors are willing to invest in alternative asset classes, we used the example of the investment strategy pursued by the Yale Endowment Fund, which is renowned for its heavy weighting towards alternative assets. The Endowment s chief investment officer, David Swensen, advocates a significant allocation to alternatives in an institutional portfolio. We asked how respondents viewed an allocation of 50% or more to alternative assets. Table 7 Attitude to allocating 50% or more to alternatives Europe Sample size 281 Similar to what we currently do 2% Great; is (or should be) our long term target 5% Conceptually good, but too difficult to achieve for our institution 25% Too risky, would not want to go anywhere close 60% Don t know 8% According to our survey findings, alternatives now account for 13% of average institutional portfolio exposure, and 60% of our respondents perceived an allocation of 50% or more as too risky. Nonetheless, a sizeable minority one in four institutions believed that this level of investment is a conceptually good idea but are deterred by the perceived difficulties of achieving such high exposure. Future asset allocation Based on the planned future allocation of respondents, we were able to calculate the likely level of future investments into alternative assets among our respondents in the next two to four years. It should be noted that we have not extrapolated these figures to reflect either all respondents or the overall European market. Table 8 Planned cash flows into alternative asset classes in the next 2-4 years Asset class (Number of respondents)?bn ( bn) % Real estate (247) 27 (18) 28% Hedge funds (263) 17 (12) 18% Private equity (200) 16 (11) 17% Infrastructure (70) 15 (10) 14% Other* (96) 28 (19) 23% Total 104 (67) 100% *Includes commodities, managed currency Figures calculated based on respondents current AUM and intended increase in investment allocations. In total, our respondents intend to invest more than?104bn ( 67bn) into alternatives over the next two to four years.

18 16 The European Alternative Asset Survey 2007 More than a quarter of these new inflows are expected to go into real estate although exposure to this asset class is already high. Infrastructure, despite being a relatively new asset class in which respondents currently hold low or no allocation, is also set to be a significant beneficiary of future investment, receiving 15% of planned inflows, or a further?14.5 billion ( 9.8bn). Future allocations to private equity and hedge funds are also high, with respondents planning to increase their current holdings by 50%. Almost a quarter of future investment is destined for other alternatives, notably commodities and managed currency. Future asset allocation by region Table 9 Planned future investments by respondents, by region (?m) 35,000 30,000 25,000 Other* Infrastructure Private equity Hedge funds Real estate 23,600 20,200 16,800 m 20,000 13,500 m 15,000 10,100 10,000 6,750 5,000 3, ,000 France (14) Germany/Austria (19) Italy (20) Neth/Belg (39) Nordics (40) Switzerland (22) UK (111) -3,400 Please note this table only shows volumes of planned investment by our survey respondents. It is not indicative of the whole of each market. No. of survey respondents shown in brackets. * Other primarily includes commodities and managed currency. While assets under management of Nordic respondents make up 23% of the total AUM of those surveyed, planned investments from the region constitute close to 30% of total planned inflows into alternatives. This shows the relative importance that alternative assets have in this region.

19 The European Alternative Asset Survey Part Two Analysis by Asset Class Real estate 1. Allocation of current investors Of the three major alternative asset classes, real estate has both the highest level of penetration and the highest proportion of portfolio assets invested in it. In both Italy and Switzerland, real estate accounts for a fifth of investment exposure on average. Table 10 Average allocation to real estate for current investors Sample size Real estate 9.1% 4.5% 8.0% 20.0% 7.8% 19.7% 8.5% 9.7% 2. Return expectations Respondents have experienced a wide dispersion in realised returns from real estate investments. However, the average annual return recorded is a very strong 12.3%. In fact, more than a third of respondents (34%) claim to have achieved returns in excess of 15%. Table 11 Realised annual return from real estate investment since inception Real estate observed returns (119 respondents) Average return of 12.3% % 10 3% 5% 13% 9% 10% 8% 13% 5% 8% 8% 0 Below 3% 3% and 5% 5% and 7% 7% and 9% 9% and 11% 11% and 13% 13% and 15% 15% and 17% 17% and 19% 19% and 21% Above 21% However, institutions seem unsure that these levels of returns can be sustained. Most are considerably more conservative in the returns they expect to achieve from real estate in the future, with the great majority anticipating returns of between 5 and 9% see Table 12. The average future return expected from real estate is 8.1% significantly less than the average realised return of 12.3% mentioned above.

20 18 The European Alternative Asset Survey 2007 Table 12 Expected long-term annual return from real estate investment Real estate expected returns (162 respondents) 31% 34% Average return of 8.1% % Below 3% 9% 3% and 5% 5% and 7% 7% and 9% 11% 9% and 11% 6% 11% and 13% 1% 13% and 15% 3% 15% and 17% 0% 17% and 19% 1% 1% 19% and 21% Above 21% Risk vs. Reward On average, the expected volatility for real estate (expressed as the annual standard deviation of returns) is an average of 8.2%. Taking the expected return of 8.1% p.a. above, this would give an average expected Sharpe Ratio of Risk perceptions We asked respondents about their main concerns regarding investing in real estate. The most prevalent concern was liquidity and how easily an investor can get in and out of a real estate investment. The Nordics were the only markets where liquidity did not appear to be a key concern. Table 13 Challenges of real estate investing4 Belgium/ France Germany/ Italy Nordics Switzerland United Sample size Too much money chasing too few deals Liquidity Access to top managers Legal, tax, and regulatory issues Investment time lag Management fees Selecting/monitoring managers Poor returns J-curve effect Volatility Institutions across a number of European markets are also concerned that there is too much money chasing too few attractive deals in real estate. Many investors also voiced concerns about their ability to access the best real estate managers. German/Austrian, Italian and Swiss respondents were heavily concerned with their legal, tax, and regulatory environments. It seems that the regulatory framework in those countries is very stringent regarding alternative assets as we have seen this concern recurring with hedge fund and private equity in the same regions. Although real estate is expected to record the lowest Sharpe ratio of our three key alternative asset classes (see above) few respondents seem explicitly concerned about the potential for poor returns or volatility in real estate investment. These possibilities only emerge as key concerns in Italy. 4 Methodology: We provided a list of potential challenges of investing in real estate, and asked respondents how concerned they were with each potential challenge on a scale of one to five, with one being the most challenging and five being the least. A tick in the table indicates that the potential challenge was ranked one or two by 40% or more of respondents from the region, making it a key challenge for the region.

21 The European Alternative Asset Survey Intentions and expectations Intended allocation to real estate To ascertain how inflows into real estate are likely to trend, we asked both current investors and non-investors about their plans for investing. Current investors Of respondents who are already invested in real estate, 30% expect to increase their exposure in the medium term (i.e. two to four years); 63% expected to make no change. Notably, 69% of respondents in Germany and Austria intend to increase exposure to real estate. Table 14 Intended change to real estate allocation Sample size Increase 30% 45% 69% 22% 28% 23% 24% 30% Decrease 5% 10% 0% 11% 0% 9% 10% 7% Remain the same 65% 45% 31% 67% 72% 68% 66% 63% On average, current investors said they were targeting a 11.0% allocation to the asset class, compared with an average current allocation of 9.7%. Since our 2003 survey into alternative assets, satisfaction with real estate seems to have increased. In 2003, 19% of institutions wanted to reduce their exposure to real estate. In our latest survey, only 7% of respondents overall were planning to decrease their exposure to real estate. However, this included 11% of Italian investors and 9% of Swiss investors both of whom already have a very high real estate exposure of 20% on average see Table 10. Non-investors Of those respondents not currently investing in real estate, only 15% said they would consider doing so, compared with 35% in This may suggest that investors with an appetite for investing in the asset class are now largely invested, while those not invested have taken an active decision not to do so. Those institutions that are planning to start investing in real estate said they were targeting an average allocation of 6%. Reasons for new investment Respondents who were planning to begin investing in real estate or increase their current exposure were asked to identify the key reason for increasing their exposure. Table 15 Reasons for increased allocation to real estate Sample size Low correlation with other asset classes 36% 33% 83% 50% 30% 20% 88% 61% Potential for higher return 46% 67% 17% 50% 40% 40% 8% 28% Low volatility 0% 0% 0% 0% 10% 0% 4% 3% Other (please specify) 18% 0% 0% 0% 20% 40% 0% 8% As Table 15 shows, the most commonly cited reason for increasing exposure to real estate was its low correlation with other asset classes. This was particularly the case in the UK and Germany/Austria.

22 20 The European Alternative Asset Survey 2007 A significant number of investors claim they are increasing exposure to capture real estate s higher return potential. But it is noticeable how few investors take this view in Germany/Austria and UK. It is also important to bear in mind that in the UK, a real estate investment will often replace part of an equity portfolio. In this context, real estate will not offer excess return potential but decorrelation benefits with other investments. The higher-than-average level of risk aversion among German/Austrian institutions could explain their reason for focusing on real estate as a source of low correlation rather than a source of higher returns. Time period for new investment We also asked over what period respondents planned to achieve their intended strategic asset allocation change. Average responses ranged from 2.1 to 4.4 years. Intended strategies for real estate investing Investors appear willing to gear up their real estate exposure to enhance potential performance. On average, 48% of respondents who are planning to increase/make new investments into real estate intend to do so through core plus/value added strategies. These are strategies that invest in high quality real estate but take more financing risk than mainstream core real estate portfolios. Table 16 Intended investment strategies for real estate investment Sample size Core 50% 40% 27% 100% 30% 60% 37% 39% Core plus/value added 70% 0% 82% 0% 80% 20% 32% 48% Opportunistic 30% 60% 36% 0% 60% 0% 16% 30% Other 0% 0% 0% 0% 0% 20% 16% 6% Figures may add up to more than 100% as respondents could choose more than one answer A high proportion of respondents in France and the Nordics also claim to be targeting opportunistic strategies that focus on higher risk real estate assets. Italian and Swiss investors appear to be the most risk-averse, with the majority looking to focus on core strategies with no exposure to opportunistic investments. Current and future structuring of investments: Intended allocation to indirect structures Beyond the new investments that respondents were planning to make, we have looked at the structure of their investments (both current and future) to assess fundamental changes within the asset class. It appears that institutional investors in Europe are starting to prefer to access real estate through indirect means rather than direct investment in bricks and mortar. More than a third of respondents (39%) claim they expect to increase their exposure to indirect real estate structures. Table 17 Intended change in allocation to indirect structures in real estate investments Sample size Increase 40% 87% 25% 33% 46% 36% 33% 39% Decrease 9% 0% 0% 11% 8% 0% 2% 4% Remain the same 51% 13% 75% 56% 46% 64% 65% 57%

23 The European Alternative Asset Survey Choice of indirect real estate investment structures The range of vehicles available in Europe for accessing global real estate markets has proliferated over the last 10 years. In particular, the concept of real estate investment trusts (REITs) has made a successful transition from the US. We asked respondents to select all indirect investment vehicles they intend to use in the future for real estate investment. Collective vehicles such as funds of funds, REITs and private pooled funds are clearly the preferred means of exposure, reflecting a desire to diversify investment exposure among managers and optimise liquidity. However, in Germany and Austria we see a high proportion of investors choosing to invest through a customised segregated mandate rather than a pooled strategy. This reflects the general trend in the German/Austrian market to prefer segregated mandates, which are easier to manage because of local custodial, regulatory and tax implications of pooled structures. Sixteen percent of respondents stated they intend to gain real estate exposure via derivatives based on underlying real estate indices. This is somewhat surprising, given that these instruments are very new to the market. However, we believe this indicates a strong interest among institutions for investment options that can increase liquidity whilst reducing fees and minimising manager risk. Table 18 Intended structure of real estate investments Sample size Fund of Funds 44% 8% 33% 38% 65% 32% 53% 46% REITs 38% 42% 53% 38% 35% 58% 38% 41% Private pooled fund 47% 42% 47% 13% 39% 42% 38% 40% Segregated discretionary mandate 22% 25% 93% 25% 35% 47% 19% 31% Derivative (based on real estate indices) 16% 8% 13% 25% 26% 5% 16% 16% Other 6% 8% 7% 13% 4% 5% 4% 5% Figures may add up to more than 100% as respondents could choose more than one answer International real estate exposure In terms of geographic allocation, almost two thirds of respondents planned to increase the international component of their real estate allocation, reflecting a high appetite for diversification within the asset class and the increased availability of cross-border property vehicles. While some investors may not be planning to increase allocations to real estate, many are looking to restructure their exposure. For example, 31% of UK investors who wanted to keep their real estate allocations constant expressed an intention to increase the proportion held in indirect investments. Key observations for real estate investing Amongst alternative asset classes, institutional investors across Europe feel most comfortable investing in real estate. The growth in property funds and property securities is opening up a broad range of new investment opportunities by sector and by region. These vehicles can also help to address the clear concerns that investors have regarding liquidity in this asset class. Unlike equities, property remains a highly domestic asset class with fairly low correlation between different geographic markets. Therefore any new opportunities that institutions have to diversify by region are to be welcomed as this should help to reduce overall risk in an institutional portfolio. Many property markets have seen a strong bull run and few institutions can afford to limit real estate exposure to a single domestic market at a time when valuations are at historic highs.

24 22 The European Alternative Asset Survey 2007 Hedge funds 1. Allocation of current investors Of the three alternative asset classes we have focused on in this survey, hedge funds have recorded the greatest increase in interest, with the percentage of institutions holding them almost doubling from 22% to 42% since Over this four year period, average portfolio allocation among European institutions has risen from 2.5% to 5.1%. Table 19 Current allocation to hedge funds Sample size Hedge funds 4.3% 2.7% 4.6% 6.2% 5.9% 5.1% 6.1% 5.1% 2. Return expectations The average annualised return that investors have achieved from hedge funds has been almost 9% representing a premium of 4 to 5% above cash. It is interesting to see how respondents experience of hedge funds performance is very similar, whereas the dispersal of returns for real estate (considered to be a safer asset class) and private equity has been much greater (see pages 17 and 27). Table 20 Realised annual return from hedge fund investment since inception Hedge fund observed returns (68 respondents) Average return of 8.9% 30 29% 29% 20 13% 10 10% 6% 6% 0 1% Below 3% 3% and 5% 5% and 7% 7% and 9% 9% and 11% 11% and 13% 3% 0% 0% 13% and 15% 15% and 17% 17% and 19% 1% 19% and 21% Above 21% Moreover, most investors expected this level of return to remain sustainable. On average, respondents said they expected hedge funds to achieve an annualised return of 8.0% over the long term. There was little dispersion around this figure, reflecting a strong consensus around expectations, perhaps due to the consistency of returns respondents have achieved to date.

25 The European Alternative Asset Survey Table 21 Expected long-term annual return from hedge fund investment Hedge funds expected returns (86 respondents) 48% Average return of 8.0% % 16% 10 7% 0 1% Below 3% 3% and 5% 5% and 7% 7% and 9% 9% and 11% 3% 11% and 13% 1% 1% 1% 0% 0% 13% and 15% 15% and 17% 17% and 19% 19% and 21% Above 21% Risk vs. Reward Respondents expect these returns to be achieved at relatively low levels of risk. Average expected volatility for hedge funds was 6.4%, giving an average expected Sharpe Ratio for the asset class of 1.06 the highest-expected Sharpe Ratio for any of the three alternative asset classes surveyed. Given that any Sharpe Ratio of more than 1 is accepted as an indication of a very attractive risk-adjusted return, then these expectations suggest a compelling investment case for hedge funds. 3. Risk perceptions Although the anticipated risk-adjusted returns from hedge funds are generally agreed to look attractive, institutional investors nevertheless have strong concerns about this asset class. The following table shows the key challenges that our survey respondents associate with hedge funds. Table 22 Challenges of hedge fund investing5 Belgium/ France Germany/ Italy Nordics Switzerland United Sample size Selecting/monitoring managers Access to top managers Management fees Headline risk6 Too much money chasing too few deals Liquidity Legal, tax, and regulatory issues Poor returns Volatility 5 Methodology: We provided a list of potential challenges of investing in hedge funds, and asked respondents how concerned they were with each potential challenge on a scale of one to five, with one being the most challenging and five being the least. A tick in the table indicates that the potential challenge was ranked one or two by 40% or more of respondents from the region, making it a key challenge for the region. 6 We did not ask about headline risk for asset classes other than hedge funds.

26 24 The European Alternative Asset Survey 2007 Investors in all seven European regions mentioned concerns regarding their ability to access top managers, the challenge of selecting and monitoring managers and the level of management fees charged. Respondents were also heavily preoccupied with the potential for headline risk. Difficult to quantify, this refers to concern over the high level of publicity attracted by hedge fund blows-ups, such as the collapse of LTCM in 1998 and Amaranth in It is interesting that investors are concerned about the perceived risks surrounding hedge funds, despite expecting them to deliver lower levels of volatility and more predictable returns than either private equity or real estate. Indeed, the potential for poor returns did not emerge as an explicit concern in any region, while only Italy selected volatility as a key concern. It therefore seems that investors are most concerned about the practicality of investing in this asset class rather than a lack of confidence in the ability of hedge funds to achieve their target returns. 4. Intentions and expectations To see if the current levels of institutional exposure to hedge funds are likely to change, we asked both current investors and noninvestors about their investment intentions. Current investors There is a significant potential for further inflows into hedge funds, with 63% of current investors planning to increase their allocation. On average, investors are targeting a 7.4% allocation to the asset class a significant increase on the current allocation of 5.1% shown in Table 19. Interest in the asset class has risen significantly since 2003, when 55% were planning to increase their investments. The change is even more marked at regional level: in 2003, 14% of UK respondents and 55% of German/Austrian respondents planned to increase their allocation, compared to 46% for the UK and 93% for Germany/Austria today. Table 23 Intended change to hedge fund allocation Sample size Increase 52% 73% 93% 82% 55% 66% 46% 63% Decrease 0% 0% 0% 0% 0% 0% 4% 1% Remain the same 48% 27% 7% 18% 45% 34% 50% 36% Non-investors Of those not currently investing in hedge funds, only 12% said they would consider doing so, compared to 49% in This suggests that investors with an appetite for hedge fund investments have now largely entered the asset class, while those not invested have taken an active decision not to do so. Non-investors planning to invest said they intended to allocate an average of 4.8% of their portfolio to the asset class. Time period for new investment It also appears that investors are keen to increase their hedge fund exposure quite soon. Respondents said they intended to implement their strategic asset allocation change within 1.1 and 2.5 years a far shorter time period than for real estate or private equity. Reasons for new investment We asked those respondents who were planning to begin investing in hedge funds or increase their current holding to identify the main reason for taking action. As with real estate, the biggest attraction of hedge funds was the low correlation with other asset classes a benefit mentioned by more than half (53%) of investors.