Allocation to alternative asset vehicles: Investment performance, decision factors and motives

Johan Holmberg & Oscar Lidfeldt

Student thesis: Master thesis

Abstract

The objective of this thesis is to analyse institutional investors engagement in alternative assets. An area where previous research has been scarce regarding the factors motivating investments in alternative assets. The aim is to address this gap by enhancing the understanding of asset allocation strategies in alternative assets and specifically the investment motives, decision factors, performance and various outlooks supporting their allocation. To achieve the objective, we composed a survey directed towards wealth management firms in Europe and to pension funds and insurance companies in Sweden. We conclude that alternative assets are indeed important in asset allocation for institutional investors. Going beyond finance theory, the motives for institutional investors to invest in alternative assets are based on an expectation of high returns, attractive risk-return profile and portfolio diversification. The main motive for investments in alternative assets among our respondents is the diversification aspect in order to achieve low correlation with other traditional assets. However, we have identified alternative assets to have significant high levels of correlation with stocks and bonds. The increased correlation between the alternative assets and traditional assets has since 2008 diminished some of the diversification value to the investors’ portfolio. Wealth management firms revealed the significance of investing in private equity funds by emphasizing the national development aspect. However, the pension funds and insurance companies disclosed no signs of interest of investing in order to stimulate domestic innovation and growth. This is interesting since previous research suggests that public pension funds should feel political pressure for making investments with respect to national development, while omitting wealth managements’ contributions. Existing limited partners appeared especially important for the smallest institutional investors. This confirms the assumption that investments in private equity to a large extent are established by a second mover approach, which infers to copy the behaviours and decisions of other investors who are perceived as having high skills and thus have attained prominence in the market.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2013
Number of pages65