Working Paper: CEPR ID: DP18352
Authors: Aleksandar Andonov
Abstract: Institutional investors segment into investors that hold simple portfolios of traditional equities and bonds, and investors that manage complex strategies in public and private markets. Investors implementing active portfolio management and holding diversified portfolios of equities and bonds are more likely to invest in alternative asset classes. The performance of institutional investors in alternative assets is significantly lower than in equities, suggesting that investors accept lower returns in exchange for diversification benefits. Institutions delegate 90% of their alternative investments to external managers and funds-of-funds. These intermediaries capture a large part of the potential diversification benefits through higher fees and lower returns.
Keywords: institutional investors; alternative assets; private equity; real estate; hedge funds; infrastructure; delegation; intermediation
JEL Codes: G11; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Larger institutional investors (G23) | Higher probability of investing in alternative assets (G19) |
| Active management in public equity (G11) | Higher probability of investing in private equity (G24) |
| Specialization in one alternative asset class (G11) | Higher returns (G19) |
| Specialization in real estate (L85) | Outperformance of diversified small investors (G11) |
| Larger investors specializing in real estate (L85) | Lower performance (D29) |