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Reflections on Russell Investments’ 2012 Global Survey on Alternative Investments

Russell Investments recently published their latest Global Survey on Alternative Investments, and it’s packed with interesting data and insights into the use of alternative investments for diversification and growth.

This survey went out to 146 institutional investment managers representing over $1.1T (that’s trillion, not billion) in assets. These folks have a huge pile of money to manage and consistently making it grow is a big challenge. They’ve learned over the years that they can’t rely only on traditional investments like stocks and bonds and so have steadily moved into alternatives such as hedge funds and real estate. In fact, the survey shows that 94% of their respondents have money in at least one form of alternative investments and that the “average” manager in the group has 22% of their total portfolio invested in alternatives.

The Russell team has subtitled the survey “The importance of diversification and alpha” and it’s easy to see why. Alternatives provide a way for money managers to diversify their portfolios and help protect them from the kind of big drops traditional investments can experience. Alternatives can also help increase a portfolio’s total return (the “alpha” in the subtitle) beyond what traditional investments alone might provide. It seems counter-intuitive, but smart use of alternative investments can actually decrease a portfolio’s risk level and increase its potential returns at the same time.

Results from the survey reflect exactly that kind of thinking. About 90% of the respondents chose alternatives to provide diversification, with 64% saying volatility reduction and low correlation to other asset classes was also important. 45% of the managers chose alternatives for alpha, and the same percentage (probably many of the same managers) choose them for their growth potential.

So, there you have it straight from the big boys – diversification and alpha. Something for the rest of us to think about when it comes to managing our own portfolios.