"The war of the giants has ended; the quarrels of the pigmies have begun"

- Sir Winston Churchill
U.K. Prime Minister (1874 - 1965)

Reportedly pointed comments from a number of U.S. public pension plans about their willingness to significantly step up alternative investments is worth noting. When the NY Common Retirement Fund (US$153 billion in AUM), South Carolina Retirement System (US$29 billion), Teachers Retirement System of Texas (US$106 billion in AUM), New Jersey (US$77.7 billion in AUM) and others are all expected to significantly step up allocations to alternatives then something BIG is going down.

The reason for all the talk of institutions "going alternative" is the plain fact that passive investment in plain vanilla equities and fixed income have all gone down the tubes in the first half of 2008. For example, when the MSCI World TR USD Index loses minus 10.35% and the Lehman Global Bond Aggregate up 3.53% then a certain amount of worry sets in. The same type of concern is now logically facing many large Asian institutional investors; specifically, Japanese pension plans and life (and non-life) insurance companies.

As we have previously estimated, the total of Japanese institutional investments in hedge funds (single managers and FoHFs) is likely to be be somewhere just under US$60 billion which was the high-point a couple of years ago - or until financial institutions started to cut back due to Basel II considerations.

As the average Japanese institutional investor is currently allocating anywhere from 6-12% of total AUM in hedge funds one might expect recent poor performance in traditional long-only product to lead many of these investors to re-up their allocations to hedge funds, private equity, real estate and commodities.

It is conceivable that hedge fund allocations might increase to 15-25% of the average Japanese institutional investor portfolio over hte medium term.

Now is the right time to market to these institutions especially if alpha producers have non-correlated positive return funds to offer. And in the current environment that might be easier said than done.

Expect trust banks, life insurers and non-lifers to listen intently, only this year, they might actually make allocations. Their fixed liabilities driven by increasing numbers of retirees depends on it! Mahalo.