A survey of 74 Japanese corporate and public pension funds by JPMorgan Asset Management suggests they will restructure their exposure to alternative investments more towards private equity and real estate, and away from hedge funds.

These investors say they will continue to expand their overall allocation to alternatives, away from domestic equity and foreign equity. Japanese pension funds already have large exposure to hedge funds and funds of hedge funds (nearly 80% of pension funds already invest), much more than American or European counterparts. But they are far less exposed to private equity, and relatively less exposed to real estate.

This reflects an early start in hedge funds, with many pension funds making an inaugural allocation as early as 2003, while only this year have some funds awarded their first mandates to private equity. It also reflects the use of a diversified portfolio of hedge funds as a low-risk, low-return substitute for domestic fixed income, a strategy initiated in the days of zero interest rates.

The pollÆs respondents have an average of only 0.6% of assets allocated to private equity, and only 1.8% to real estate, versus 8.5% to absolute-return products.

This may explain why 45% of respondents told JPMorgan that satisfaction with absolute-return strategies has been ôless than expectedö û and this poll was largely taken in July and August, before hedge fund returns plummeted in September and October. Conversely, satisfaction with private equity and real estate is high, but thatÆs because there hasnÆt been a chance to be disappointed.

Regardless, 10% of pension funds who already invest in alternatives say they will decrease their hedge fund exposure û although 27% say theyÆll increase it. But private equity is clearly favoured, with 37% of respondents who already have some exposure saying they intend to increase it. In particular, they indicate the preferred route will be via funds of private-equity funds.

Whereas in the past, hedge funds served as a substitute for bonds, now pension funds are going into private equity because they expect it to deliver high returns.