US investors have changed their approach to risk, Natixis AM finds
Three in four US institutional investors have changed their approach to risk management over the past five years and now consider the use of alternative investments essential to diversify portfolio risk, according to a study on 151 US- based institutional investors published today by Natixis Global Asset Management.
According to the survey, 64% of US institutional investors say that traditional diversification and portfolio construction techniques need to be replaced and no longer consider conventional 60/40 portfolios to be the best way to pursue returns.
Approximately two-thirds believe that increasing allocations to non-correlated assets and increasing the use of liquid alternatives are effective strategies for managing portfolio risk.
“Years of market instability have US institutional investors on edge,” said John T. Hailer, chief executive officer of Natixis Global Asset Management in the Americas and Asia.
He added: “In their view, markets are driven more by economic and political events than by fundamentals. As a result, decisions are often made for defensive reasons. What US institutional investors are looking for now are better responses to manage volatility and risk.”
Moreover, 68% of US institutional investors cited Europe’s financial woes as one of the three most likely sources of market volatility in the next two years. Nearly half said Europe’s woes are one of the top three issues keeping them awake at night, followed by 30% who selected regulatory uncertainty.
Asked about the highest threat to meeting institutional investment objectives, 40% of the respondents cited global equity market risk, with global fiscal imbalances ranked second.
Investors are also concerned about impacts of anticipated regulatory changes. A substantial majority believes there will be a tightening of regulatory restrictions on financial institutions and capital markets participants, regardless of the outcome of the US elections.
Three in four also believe US financial institutions will have limits placed on their market-making abilities, resulting in their being less competitive. About 64% believe mark-to-market regulatory requirements prevent investors from being able to capitalize on market opportunities.
Of the respondents who invest in alternative investment products such as hedge funds, private equity and alternative mutual funds, 88% are pleased with the performance of their investments.
Finally, when asked what they would do if they had to make the choice all over again, 93% said they would increase their allocation to alternatives or invest the same amount, and just 7% said they would decrease their allocation.