âAlternativeâ investments, which include private equity, real estate, venture capital and hedge funds, are today seen as asset classes that are distinct from âtraditionalâ investments, such as equities and bonds. Alternative investments is now the fastest growing sector of investment management in many markets around the globe. In 2003, US institutional investors allocated US$400 billion to alternative investments, a figure that has doubled in four years from the US$200 billion allocated by the same investors in 1999.
This growing popularity of alternative investments follows the equity market collapse of the 1990s when many investors began to question whether it was prudent to concentrate their investment portfolios solely in traditional areas. They saw the benefit of diversifying into alternative investments. Not only did alternative investments have a low correlation to the public markets, but also they exhibited excellent overall returns in both absolute and risk-adjusted terms. Adding private equity, real estate, venture capital and hedge funds to a traditional investment portfolio, investors realised, could increase their overall returns. It could also lower the risk and volatility in their portfolios and preserve their capital during less favourable public market conditions.
Delegates at the events heard from Gary Long, Investcorpâs Chief Operating Officer, how Investcorp and its investors had been pioneers in the alternative investment sector: "We have been in this sector for over twenty years and have a demonstrable track record. Today, our clients entrust us with over US$5.6 billion of funds under management in the areas of private equity, real estate investment, hedge funds and venture capital," he said.
"Investcorpâs track record speaks for itself. In realized private equity investments the internal rate of return to our investors has been 21 percent per annum, for realized real estate investments it has been 16 percent per annum and for realized technology venture investments it has been 30 percent per annum. The internal rate of return to investors in our hedge funds program has been 8 percent per annum since inception."
Mr Long advised investors to be highly discriminating: "Alternative investments are now a critical component of your strategic asset allocation, but this is a specialist area. You should look for a firm that has institutionalised investment processes carried out by experienced teams, each with a thorough understanding of their asset type, and who can prove to you that they have a track record as best-in-class providers," he concluded.