market pulse alternative assets survey

Market Pulse: Alternative Assets SurveyKey findings from J.P. Morgan Asset Managements latest poll of institutional investors

O v e r v i e w

The experiences and lessons of the recent financial crisis, the most devastat-ing period for market participants in the post-World War II era, can be expected to have a lasting impact on the investment outlook, behavior and strategies of institutional investors. J.P. Morgans Market Pulse surveys are designed to capture the changing perspectives, shifting allocations and developing portfolio management trends of investors as they continue their passage out of crisis, into recovery and beyond.

In our latest survey, Market Pulse: Alternative Assets, conduct-ed in March through April of this year, we set out to test the

hypothesis that after an initial pause and re-assessment of portfolio strategies following the depths of the crisis, investors are resuming their steady march from the traditional to the alternative. The results of our research suggest this is indeed the case.

Our 2010 survey encompasses the views of 349 North American investors from 325 institutions including corporate plans, public funds, endowments, foundations and others (see sidebar, over-leaf). Through an on-line survey with a specific focus on alterna-tive assets including: hedge funds, private equity, real estate, infrastructure, commodities and other real assets, we asked these investors to share with us where they are now, where they are headed over the next 12 months and what their strategic investment objectives are over a two to three year horizon.

Survey results confirm that overall, investors are carving out a broader role for alternatives while trimming back traditional

Market Pulse: Alternative Assets SurveyKey findings from J.P. Morgan Asset Managements latest poll of institutional investors

O v e r v i e w

The experiences and lessons of the recent financial crisis, the most devastat-ing period for market participants in the post-World War II era, can be expected to have a lasting impact on the investment outlook, behavior and strategies of institutional investors. J.P. Morgans Market Pulse surveys are designed to capture the changing perspectives, shifting allocations and developing portfolio management trends of investors as they continue their passage out of crisis, into recovery and beyond.

In our latest survey, Market Pulse: Alternative Assets, conduct-ed in March through April of this year, we set out to test the

hypothesis that after an initial pause and re-assessment of portfolio strategies following the depths of the crisis, investors are resuming their steady march from the traditional to the alternative. The results of our research suggest this is indeed the case.

Our 2010 survey encompasses the views of 349 North American investors from 325 institutions including corporate plans, public funds, endowments, foundations and others (see sidebar, over-leaf). Through an on-line survey with a specific focus on alterna-tive assets including: hedge funds, private equity, real estate, infrastructure, commodities and other real assets, we asked these investors to share with us where they are now, where they are headed over the next 12 months and what their strategic investment objectives are over a two to three year horizon.

Survey results confirm that overall, investors are carving out a broader role for alternatives while trimming back traditional long-only equity allocations.

Alternative Assets Survey

2 | Market Pulse: Alternative Assets SurveyKey Findings

research MethOdOlOgyOur on-line survey was completed by 349 respondents from a universe of approximately 3,000 North American institutional investors, including clients and prospects of J.P. Morgan Asset Management, across all client segments.

Nowhere is this trend toward alternatives more pronounced than among public pension plans, where alternative alloca-tions are set to increase from 14% to 21% of assets over the next two to three years.

The endowment model appears alive and well. Alternatives continue to dominate the portfolios of larger E&Fs (with $1 billion or more in assets) while allocations among smaller E&Fs (under $1 billion) are well above those of corporate and public plans of similar size, and growing at a healthy pace.

Corporate plans, driven by the need to control the volatility of funded status while enhancing returns, are increasing fixed income allocations (and their duration) and expanding alternatives (though at a slower rate than their public fund counterparts).

In addition to these broad findings across investor types, on the strategy level we find:

Over the next three to five years, Asia/Pacific is viewed as the region of greatest opportunity for alternative investments; private equity and infrastructure allocations to the region are expected to see notable growth, albeit from a small base.

While liquidity is a primary concern, it has also created opportunity; among those investing or planning to invest in private equity, almost 40% have invested or intend to invest in the secondary market.

Investors are adopting a more risk factor-based view of hedge funds within the portfolio contexttreating them, not

as a separate asset class but rather as a less constrained, more actively managed and less liquid extension of their traditional debt and equity allocations.

Of course, different types of institutions vary in their specific investment objectives, regulatory constraints and challenges in ways that shape their investment behaviors. And to be sure, the experiences of the past few years have brought a sharper focus on transparency, fees, lock-ups and other liquidity-related issues often associated with alternative investing. But market dynamics have also shown that volatility and turmoil can offer opportunities for alpha generation in the hands of skilled, less constrained managers. Whats more, the financial crisis has emphasized the importance of diversification, inflation protec-tion and managing down-side risk while striving to maximize returns over the long run. Our results suggest that investors understand and value alternatives for their potential to address these risk and return objectives.

To varying degrees and in different ways, corporate and public plans, endowments, foundations and other institutions are continuing to evolve in their use of alternatives, expanding into new markets and strategies, adopting new perspectives and, in the process, defining an increasingly important role for alternative strategies in their portfolios.

This report provides the key findings of our survey. A more detailed analysis will be made available later this summer.

Corporate 43%

Public Fund 18%

Endowment/Foundation23%

Taft Hartley 3%

Other 12%

Less than $1 billion45%

$1 billion to

J.P. Morgan Asset Management | 3

K e y f i n d i n g s

Market Outlook: What a Difference a Year Makes

Our survey was conducted in MarchApril 2010, when equity markets had rebounded, credit spreads had tightened consider-ably from their wides, and real estate was poised to rebound. On most fronts, the world was a lot brighter than at the time of our last Market Pulse survey in AprilMay, 2009.1 Admittedly, recent developments in Greece and other eurozone economies, disappointing U.S. employment results and May/June market declines have since shaken investors confidence to some degree but, at the time of our 2010 survey, respondents:

Anticipated a rising rate environment (72% expected increasing yields over the next 12 months)

Had positive expectations for equity returns (60% expected an increase over one year, building to 70% over a five year horizon)

Believed the outlook across most alternatives would improve in the ensuing 12 months, with the most positive outlook for private equity (Exhibit 1)

Saw the greatest opportunities over the intermediate term in real estate and hedge funds (Exhibit 2)

Viewed Asia/Pacific as the geographic region of greatest opportunity for alternatives over the next three to five years (Exhibit 3)

Results for real estate revealed some uncertainty about the timing of a rebound. As seen in Exhibit 1, twenty-five percent of respondents thought the outlook for real estate would get worse over the coming 12 months. Further, when asked explic-itly about the timing of a real estate turnaround, over half (55%) saw 2011 as the turnaround year, while 10% anticipated a rebound in 2010, 18% in 2012 and 13% in 2013 or later (the remainder did not provide a specific time frame). However, as seen above, when investors were asked to choose the alter-native with the greatest investment opportunities three to five years out, real estate was a top choice (Exhibit 2).

exhibit 1: Overall, an iMprOving OutlOOK fOr alternatives Over the next 12 MOnths

Q: what is your investment outlook for the following alternative asset classes over the next 12 months?base = 349 respondents

exhibit 2: greatest investMent OppOrtunities Over the next 3 tO 5 years

Q: Of the following alternatives, which do you feel offers the greatest investment opportunity over the intermediate investment term? (i.e., 3 to 5 years... check only 1)base = 349 respondents

exhibit 3: investOrs are bullish On asia/pacific fOr alternative investMents

Q: which of the following geographic regions do you feel offers the greatest opportunity for alternative investments over the intermediate investment term (i.e., 3 to 5 years)? (check one)base = 349components may not sum to 100% due to rounding.

0 20 40 60 80 100

56 13 32Hedge Funds

62 12 26Private Equity

52 25 22Real Estate

44 10 46Infrastructure

53 14 32Commodities

44 9 48OtherReal Assets

Improving Worsening No change

% of respondents

Hedge Funds24%

Private Equity21%

Real Estate24%

Infrastructure9%

Commodities16%

Other Real Assets6%

North America37%

Europe3%

Asia/Pacific56%

Other5%

1 Market Pulse: Equity Views Survey, April-May 2009, J.P. Morgan Asset Management.



Allocations: Back on Track from Traditional to AlternativeOur broad asset allocation results suggest to us a shift in pos-ture on the part of investors with respect to portfolio allocations since the months shortly after the peak of the financial crisis.

We conducted our first Market Pulse survey in AprilMay 2009, just after the S&P 500 hit its March lows following a decline of 57% from its October 2007 peak. We found investors cautiously rebuilding their equity portfolios back toward pre-crisis tar-gets, with little change in alternatives looking 12 months out (Exhibit 4, left side).

In contrast, broad asset allocation results from our recent 2010 survey (Exhibit 4, right side) indicate an increase from 16% year-end 2009 actual alternative allocations to a strategic target of 20% over the next two to three yearsan increase funded primarily by a decline in equity allocations.

We have observed a shift toward alternatives and away from traditional assets (among pension plans) in our survey research since 2006.2,3 We see in our latest results evidence that investors are back on this track, following a crisis-induced period of re-evaluation.

How pervasive is this increasing reliance on alternatives? In addition to overall shifts in average allocations, our analysis looked at the number of investors increasing, decreasing and maintaining total alternative allocations (comparing year-end 2009 to strategic levels two to three years out) and found that the majority (56%) have set strategic allocations above actual 2009 levels while 31% planned to maintain 2009 allocations. Only 13% were planning to decrease alternatives shareand these investors already had relatively large average alloca-tions to alternatives (24.8%) (Exhibit 5).

exhibit 4: after a pause fOr reassessMent, investOrs are again shifting tOward alternatives

Q (2009 survey): please indicate your asset allocation as of 12/31/08 as well as your original target weight at that time. please also indicate what your target allocation is for 12 months from now.Q (2010 survey): please indicate your current asset allocation (as of 12/31/09), your target asset allocation (12/31/10) as well as your strategic asset allocation (23 years out).base (2009 survey): 272 total; corporate 147; public 52; e&f 35, taft-hartley/Other 38base (2010 survey): 306 total; corporate 138; public 56; e&f 65; taft-hartley/Other 47

Source: J.P. Morgan surveys: Market PulseEquity Views Survey, 2009; Market PulseAlternative Assets Survey, 2010.

54

47

51

4645

43

3135

3335 35 35

12 13 13 16 18 20

3 5 3 3 2 2

0

1020

30

40

50

60

70

80

90

100

Original2008 Target

Actual2008

12monthTarget

Actual2009

Target2010

Strategic (23 years)

Market PulseSpring 2009 Survey Market PulseSpring 2010 Survey

Equities Fixed income Alternatives Cash

Perc

ent

2 Pension Investment Strategies for a New Playing Field: J.P. Morgans survey of major U.S. pension plans, JuneJuly, 2006.

3 Next Generation Alternative Investing: J.P. Morgans survey of major U.S. institutional investors, First Quarter, 2008.

exhibit 5: the MajOrity Of investOrs are increasing Or Maintaining tOtal alternative allOcatiOns

base = 306 respondents

12

14

16

18

20

22

24

26

28

Actual 2009allocation

Target 2010allocation

Strategic (23 years)allocation

Alt

erna

tive

allo

cati

on (%

)

56% of respondentsIncreasing 14.6 19.3 23.3

31% of respondentsMaintaining 14.3 14.2 14.3

13% of respondentsDecreasing 24.8 23.7 23.7


How Alternatives Stack UpThe advantages of the most established categories of alternatives are by now well known among institutional investors: return enhancement, diversification and, in the case of real estate, inflation protection. However, as with most asset classes, the recent financial crisis served to underline their disadvantagese.g., less liquidity and transparency and higher fees than traditional long-only strategies (Exhibit 6). Yet, our results suggest that on balance, given recent experiences and lessons learned, investors have maintained their faith in alternatives and overall, are expanding allocations to these strategies, seeking greater diversification and a more optimal alpha/beta mix. Hedge funds, private equity and real estate alike are expected to participate in the growth of alternative allocations over the next two to three years. At the same time, infrastructure, commodities and other real assets, currently representing a small portion of alternative portfolios overall, are expected to attract new investors (Exhibits 7, 8 and 9).

exhibit 7: MOdest increases expected acrOss alternative categOries


Hedge Funds Private Equity Real EstateInfrastructure Commodities Other Real Assets

0

5

10

15

20

25

5.6

4.0

3.9

15.8

Actual2009

6.4

4.5

4.5

18.2

Target2010

6.8

4.9

4.9

20.2

Strategic(23 years)

Perc

ent

exhibit 8: percentage Of respOndents currently investing and planning tO invest in...


% investing % planning to

46

8

HedgeFunds

52

8

PrivateEquity

61

8

RealEstate

9

9

Infrastructure

16

10

Commodities

17

5

OtherReal Assets

Perc

ent

exhibit 9: average allOcatiOns fOr thOse currently investing in

number of investors in parenthesis. due to small sample size, some results should be interpreted directionally only.

4.3

5.7

12.3

13.6

7.68.5

6.37.2

5.2 5.1

6.7 6.8

Hedge Funds(140)

Private Equity(160)

Real Estate(188)

Infrastructure(29)

Commodities(48)

Other Real Assets (51)

Actual 2009 Strategic (23 years)

Perc

ent

exhibit 6: alternativesgreatest advantages and disadvantages

base = hedge funds: investing/planning to invest 191, not planning to 158; private equity: investing/planning to 211, not planning to 138; real estate: investing/planning to invest 248, not planning to 101.Q: when considering investments in (alternative), what are the top three advantages/disadvantages [check 3]? (for those investing/planning to)Q: what are the top three challenges preventing you from investing in (alternative) [check 3]? (for those not planning to invest)

greatest advantages

greatest disadvantages

greatest deterrents

hedge funds

Diversification 73%Returns 63%Volatility of returns 51%

Fees 70%Transparency 68%Liquidity 67%

Transparency 59%Fees 44%Volatility of returns 28%

private equity

Returns 94%Diversification 68%Top manager access 42%

Liquidity 85%Fees 68%Transparency 27%

Liquidity 62%Transparency 43%Fees 30%

real estate

Diversification 81%Inflation protection 65%Returns 63%

Liquidity 79%Fees 48%Leverage 34%

Liquidity 66%Returns 29%Internal resources 25%



hedge fundsWhile hedge funds are a less seasoned component of institutional portfolios with somewhat lower participation rates than private equity or real estate (Exhibit 8), they have the largest average allocations, with current investors putting, on average, 12% of portfolio assets into this alternative asset category (Exhibit 9). Across all respondents (investors and non-investors), average allocations are expected to increase from 5.6% to 6.8% (Exhibit 7). As shown in the Peer Perspectives section below, while endowments and foundations dominate this space, public funds, which currently have the smallest hedge fund allocations and lowest participation rate, are expected to have the fastest rate of growth in hedge funds across institutional segments.

Given that hedge funds are essentially the ultimate expression of active management within the spectrum of equity and credit strategies, there has been much discussion about how they should be categorized within institutional portfolios: along with the appropriate traditional asset category, or as a stand-alone hedge fund or absolute return allocation. Our results show that various approaches are being used, with a stand-alone hedge fund allocation still most common, but with equity/fixed income categorization gaining ground, particularly among larger firms (Exhibit 10).

private equityMore than any major alternative category, private equity is valued first and foremost for return generation. Participation rates are higher than for hedge funds and lower than for real estate, while the reverse is true for average allocations among current investors (lower than for hedge funds, higher than for real estate, Exhibits 8 and 9). Across all investors, allocations are expected to increase from 4.0% to 4.9% (Exhibit 7). This is another alternative category where E&Fs dominate, but where public funds anticipate significant increases in allocation and participation rates.

While liquidity has been an acute concern for private equity investors through the recent market turmoil, the need for liquidity has generated attractive investment opportunities. This is evidenced by the 39% of investors who reported having purchased private equity interests on the secondary market in the past 12 months (26%) or those planning to do so over the next 12 months (13%) (Exhibit 11).

exhibit 10: investOrs are beginning tO categOrize hedge funds as part Of eQuity and fixed incOMe allOcatiOns

Q: how do you categorize your hedge fund allocation? (check all that apply)base = less than $1 billion 77, $1 billion to < $10 billion 90, $10 billion+ 24due to small sample size, some results should be interpreted directionally only.

0 10 20 30 40 50 60

2632

53

4342

5

37

52

52

39

7

6

38

46

50

8

By risk factor/traditionalasset categories

(e.g. Equity/Fixed Income)

As a stand-alone Hedge Fund allocation

Absolute return

Other

Less than $1 billion $1 billion to


Investors also see private equity as a way to benefit from the Asia growth story. While Asia/Pacific accounts for only 10% of current private equity portfolio allocations, that share is expect-ed to increase to 15% over the next 12 months (Exhibit 12).

real assets: real estateReal estate has an important role in institutional portfolios as a diversifier, source of returns and an inflation hedge (an increasing concern for investors, given budget deficits resulting from accommodative fiscal and monetary policy in response to the financial crisis). A greater percentage of investors participate in real estate than in any other alternative category (Exhibit 8). With current allocations (3.9%) below strategic targets (4.9%), growth is anticipated (Exhibit 7).

Public funds are expected to be the drivers of this allocation shift, since (based on our detailed analysis) almost all public funds (89%) invest in real estate; their average allocations are greater than those of corporate plans or E&Fs and they have the largest gap between current and strategic allocations (see Exhibit 16, page 9).

real assets: infrastructure, commodities and otherReal assets, broadly defined to include not only real estate, but also infrastructure, commodities and other real assets (maritime investments, oil and gas, timber, water rights and other private partnerships), can provide investors with opportunities to further enhance returns, diversify portfolio assets and manage the impact of inflation on asset values.

These real opportunities (infrastructure, commodities and other real assets) represent only a thin slice in the portfolios of our survey participants, accounting for 2.4% of average portfolio allocations today, and targeted to increase to 3.6% over the next two to three years. Participation rates are expected to rise, particularly for infrastructure and commodi-ties. Additionally, among the 17% of respondents currently investing in other real assets, average allocation levels are comparable to those for real estate (Exhibits 8 and 9).

Infrastructure to-date, appears to have the greatest appeal for public funds, with 18% currently investing and 20% plan-ning to. Perhaps this is a result of infrastructures real estate-like diversification, inflation-protection and income-producing characteristics and the social and economic (in addition to investment) benefits that states and municipalities derive from investing in infrastructure.

Our survey indicates that, as in the case of private equity, investors see infrastructure as another way to access growth opportunities in the Asia/Pacific region (Exhibit 13).

Commodities and other real assets are (as seen in the Peer Perspectives section below) a clear area of interest for endowments and foundations. Once again, these institutions appear to be leading the way as they search for new sources of alpha, uncorrelated returns, and to preserve the real value of their assets.

exhibit 13: allOcatiOns tO asia/pacific infrastructure are expected tO increase

Q: please indicate the percentage of your infrastructure portfolio you currently invest and plan to invest (12 month target) in the following geographic areas (total = 100%).base: current allocation 36, planned allocation 42due to small sample size, results should be interpreted directionally only.

exhibit 12: investOrs perceive OppOrtunity in asia/pacific private eQuity

Q: please indicate the percentage of your private equity portfolio you currently invest and plan to invest over the next 12 months, in the following geographic areas (total = 100%).base: current allocations 168, planned allocations 134components may not sum to 100% due to rounding.

70

1610

3

64

1815

3

0

10

20

30

40

50

60

70

80

North America Europe Asia/Pacific Other

Current allocation (%) 12month target (%)

Perc

ent

Current allocation (%) 12month Target (%)

Other

2 20

10

20

30

40

50

60

70

80

6862

North America

24 24

Europe

612

Asia/Pacific

Perc

ent



Peer PerspectivesThe steady growth trend in alternatives and the decline in more traditional assets is apparent, not only in aggregate, but within specific investor segmentsacross corporate plans, public funds, endowments and foundations. But these broad allocation shifts, as well as the composition of alternative portfolios, are nuanced by the primary objectives and specific challenges faced by each distinct investor type (Exhibits 14, 15 and 16).

corporate plansOur survey results confirm that the primary objective for corporate plans in managing pension assets is asset/liability management (followed by return generation)with the greatest challenges revolving around funded status and liquidity concerns (Exhibit 14).

These objectives and challenges are driven largely by the need to meet pension benefit obligations in the long run, while adapting to progressively more stringent funding and accounting regulations (under the 2006 Pension Protection Act, SFAS 158 and FSP SFAS 132(R)-a), for example) which have short-term implications for managing portfolio assets. These rules and regulations have increased funding targets, imposed more market-based valuation of assets and liabilities and essentially recognized pension-funded status on corporate balance sheetsall of which has heightened the need for pension plan CIOs to more carefully manage the volatility of funded status and contributions.

Our findings suggest that the anticipated responses of corporate plans to this two-pronged challenge include steps designed to better match the sensitivity of assets and liabilities to changes in discount rates (e.g., increasing fixed income allocations and extending duration) and to increase diversification and enhance returns (e.g., increasing allocations to alternatives such as hedge funds, while decreasing traditional equity allocations) (Exhibits 15 and 16).

public fundsGenerating returns is the primary objective for public plans; doing so while effectively managing portfolio risk is their greatest challenge. In terms of managing alternative assets, selecting top managers and the resources required for effective due diligence, together with liquidity are principal concerns.

One of the surveys clearest indications is that public funds are aggressively embracing the use of alternatives in addressing these risk and return challenges. Over a two-to-three year horizon, these investors are expecting to shift from portfolios with over 85% in traditional assets, to a more alpha-focused mix with 21% in strategic allocations to alternatives, funded by decreasing allocations to both equity and fixed income. The percentage of assets allocated to hedge funds and private equity (currently at or below levels for corporate pension plans) are expected to grow at significantly faster rates than for their corporate counterparts. Even real estate, where public fund allocations are already double those of corporate plans, is expected to see substantive increases, as are allocations to other real assets, such as infrastructure.

corporate (150, 98, 74) public (63, 50, 37) e&f (81, 56, 50)

primary objective Asset liability (ALM) 47%Return generation 31%

Return generation 50%Volatility management 21%

Return generation 60%Volatility management 12%

greatest challenge: portfolio assets Allocation/ALM 20%Funding status 16%

Risk/return 22%Return expectations 14%

Return expectations 23%Liquidity 16%

greatest challenge: alternative assets Liquidity 22%Allocation 14%

Resources, liquidity, manager selection 14% Liquidity 28%Transparency 14%

exhibit 14: differences in Objectives and challenges shape investMent behaviOrs acrOss institutiOnal segMents

respondent base in parenthesis (e.g., 150 corporate plans responded to Q1: what is your primary objective?); due to small sample size, some results should be interpreted directionally only.Q1: what is your primary portfolio objective driving your asset allocation decisions (Check one: return generation, volatility management, asset liability management, protection against inflation, preserving liquidity, other).Open-ended questionsQ2: what is the biggest challenge you face when you think about managing your portfolio assets?Q3: what is the biggest challenge you face when you think about managing your portfolios alternative asset allocation?


11.6

6.1

4.2

2.7

26.1

3.6

3.0

2.6

10.6

4.3

3.3

2.9

12.1

4.6

3.5

3.3

13.6

2.6

2.9

5.8

13.7

3.7

3.8

7.5

18.2

4.2

4.6

8.1

20.9

12.3

6.6

4.7

3.3

28.8

12.6

7.2

5.0

3.4

30.7

Hedge Funds Private Equity Real Estate Infrastructure Commodities Other Real Assets

0

5

10

15

20

25

30

35

Corporate (138) Public Fund (56) Endowment/Foundation (65)

Perc

ent

Actual2009

12monthTarget

Strategic23 years

Actual2009

12monthTarget

Strategic23 years

Actual2009

12monthTarget

Strategic23 years

exhibit 15: the trend tOward alternatives is seen acrOss investOr segMents

Q (2009): please indicate your asset allocation as of 12/31/08 as well as your original target weight at that time. please also indicate what your target allocation is for 12 months from now.Q (2010): please indicate your current asset allocation (as of 12/31/09), your target asset allocation (12/31/10) as well as your strategic asset allocation (23 years out).base (2009 survey): 272 total; corporate 147; public 52; e&f 35, taft-hartley/Other 38base (2010 survey): 306 total; corporate 138; public 56; e&f 65; taft-hartley/Other 47components may not sum to 100% due to rounding. due to small sample size, some results should be interpreted directionally only.

0

10

20

30

40

50

60

70

80

90

100

Perc

ent

Equities Fixed income Alternatives Cash

51

Spring 2009 survey

Spring 2009 survey

Spring 2009 survey

51

36

10

3

46

40

11

3

45

41

12

2

42

42

14

2

52

31

15

3

52

32

14

2

50

31

18

1

48

30

21

1

54

23

21

3

47

23

26

4

48

22

29

1

46

22

31

1

2009Target

2009Actual

12monthTarget

Strategic23 years

2009Target

2009Actual

12monthTarget

Strategic23 years

2009Target

2009Actual

12monthTarget

Strategic23 years

Corporate Public Fund Endowment/Foundation

exhibit 16: alternatives stacK up differently acrOss investOr segMents

number of respondents in parenthesis.



We see this dichotomy between public and corporate pension plan strategies to be attributable to a number of factors, but primarily to current differences in funding and accounting regulations (e.g., less market-oriented valuations of assets and liabilities, different smoothing specifications, less emphasis on quarter-to-quarter funded status volatility) which allow public plans to focus more on the long-term objective of meeting benefit obligations and somewhat less on short-term volatility concerns.

Further, the Cost of Living Adjustments (COLAs) embedded in many public pension plans (and less common for corporate plans) are one consideration likely to be driving larger allocations to real assets, given their potential inflation protection benefits.

endowments and foundationsEndowments and foundations manage their portfolios to main-tain current payouts while protecting the real value of assets. Their primary objectives, like those of public funds, are return generation and managing volatility. Liquidity is clearly viewed as a major portfolio management challenge.

With generally fewer investment restrictions than pension plans, endowments and foundations are able to manage assets more opportunistically and have traditionally relied on alternatives, particularly hedge funds, to a much greater extent than corporate and public pension plans. This more aggressively diversified portfolio allocation profile reflects the so-called endowment model, a well-known investment

approach, championed most notably by David Swensen, CIO at Yale University.4 The model is designed to allow alpha opportunities to be exploited while diversifying and protecting portfolios on the downside to enhance returns over the long term. However, in the course of the recent financial crisis, its assumptions regarding the trade-off between liquidity and returns have been brought into question.5

Our survey covers a broad distribution of endowments and foundations, from small to moderately large plans (69% under $1 billion and 29% between $1 billion and $10 billion).6 While in general, their alternative portfolios may not all reflect endow-ment model proportions, current allocations for E&Fs in our sample are much larger than for corporate and public pension plans of comparable asset size. Additionally, they appear to have embraced other real assets (which we would define as including private partnerships in oil and gas, timber, maritime, water rights, etc.) to a greater extent.

Our detailed analysis by size category found that average allocations to alternatives for larger E&Fs are 44%, increasing to 46% over the next two to three years. Though their growth rate is slow, we see little evidence that liquidity issues are forcing these plans to abandon alternatives. For plans with under $1 billion in assets, alternatives comprise roughly 18% of portfolios, on average, and are expected to increase at a healthy pace, reaching 23% over the next two to three years.

4 See David Swensen, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Free Press, 2000.

5 For more on the endowment model and incorporating liquidity into asset allocation decisions for E&Fs, see: Defending the Endowment ModelQuantifying liquidity risk in a post-credit crisis world, J.P. Morgan Asset Management, June 2010.

6 Asset allocation data were provided by 65 endowments and foundations in our survey, including 45 E&Fs with under $1 billion in assets, 19 with between $1 billion and $10 billion, and 1 with $10+ billion. Due to small sample size for larger institutions, these results should be interpreted directionally only.


ConclusionThe recent financial crisis has clearly shaken the confidence of investors but in our survey as well as our continuing conversa-tions with clients, we see resiliency, flexibility and an openness to re-think investment approaches from the inside out. Our survey results indicate a willingness to re-examine pre-crisis target allocations and to understand more completely the alpha, beta and liquidity risk components of their investments. Investors are beginning to think more holistically about their portfoliosviewing hedge funds investments, for example, as a less liquid, unconstrained extension of traditional equity and fixed income allocations. In their open-ended survey respons-es we see a desire: to better understand total plan character-istics and risk and the economic sensitivities of individual investments; to incorporate liquidity into asset allocation models, and to manage downside or left-tail risks.

These findings indicate to us a renewed commitment to alternatives as investors continue to fine-tune their strategies and frameworks for optimizing portfolio risk/return and liquidity trade-offs. We believe the increasing innovation within alternatives and the expanding global dimension of

these investment opportunities, as well as industry and regulatory responses to investors demands for improved transparency, will lend support to these trends.

We hope this research can offer a valuable perspective to investors on how others, inside and outside their industry seg-ments, are responding to a challenging and changing invest-ment environment. At the same time, we recognize that each investor is unique in their needs, objectives and constraints and we remain committed to partnering with them as they continue to define the evolving role of alternatives within their own investment strategies.

AcknowledgementJ.P. Morgan Asset Management would like to thank all 349 investors and the 325 institutions they represent for respond-ing to our survey. Without their participation, this report would not have been possible.


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FOR QUALIFIED PURCHASERS ONLY. This presentation has been prepared for persons who qualify to invest in private equity investments as mentioned in this presentation. Generally they would include persons who are Qualified Purchasers for the purpose of the Investment Company Act of 1940 and Accredited Investors for the purpose of the Securities Act of 1933. The presentation is confidential and may not be reproduced or used as sales literature with members of the general public.

This document is intended solely to report on various investment views held by J.P. Morgan Asset Management. Opinions, estimates, forecasts, and statements of finan-cial 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. Indices do not include fees or operating expenses and are not available for actual investment. The information contained herein employs proprietary projections of expected return as well as estimates of their future volatility. The relative relationships and forecasts contained herein are based upon proprietary research and are developed through analysis of historical data and capital markets theory. These estimates have certain inherent limitations, and unlike an actual performance record, they do not reflect actual trading, liquidity constraints, fees or other costs. References to future net returns are not promises or even estimates of actual returns a client portfolio may achieve. The forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

Arbitrage strategies are highly complex. Such trading strategies are dependent upon various computer and telecommunications technologies and upon adequate liquidity in markets traded. The successful execution of these strategies could be severely compromised by, among other things, illiquidity of the markets traded. These strategies are dependent on historical correlations that may not always be true and may result in losses.

Investors should consider a hedge fund investment a supplement to an overall investment program and should invest only if they are willing to undertake the risks involved. A hedge fund investment will involve significant risks such as illiquidity and a long-term investment commitment.

Private equity investments may be illiquid, present significant risks, and may be sold or redeemed at more or less than the original amount invested. The value of invest-ments and the income from them may fluctuate and your investment is not guaranteed. Past performance is no guarantee of future results.

Real estate and infrastructure investing may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate and infrastructure investing 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 borrower.

J.P. Morgan 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., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management Inc.

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2010 JPMorgan Chase & Co. | Alternative Survey_Executive Summary

authOrs advisOr

Annette WhittemoreHead of Market Research and Development

Barbara HeubelSenior WriterInstitutional Marketing

Karin Franceries, CFAVice PresidentStrategic Investment Advisory Group

market pulse alternative assets survey

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