Even though alternative investments that follow hedge-fund-like strategies are currently frowned upon because of poor absolute performance, Nuveen Investments LLC is betting that such investments once again will be viewed favorably.
In fact, it announced the creation of Nuveen Alternative Investments on Nov. 13.
One of the key objectives of the unit is the creation of a suite of alternative investments as well as the development of Nuveen's Global Endowment Model.
The model will draw upon the expertise of Nuveen Investment Solutions — formerly Richards & Tierney Inc. of Chicago — to employ asset allocation, global manager search and selection, and risk management strategies similar to those used by the largest pension and endowment programs.
It's an interesting time to launch such an effort.
Most alternative investments — a wide universe of investments that can include anything from commodities funds to funds of hedge funds — are sold on the basis that they provide investors uncorrelated returns to equities, said Michael Herbst, a fund analyst with Morningstar Inc. of Chicago.
CORRELATED RETURNS
As a result, many investors have been surprised to discover that when markets collapse, performances of alternatives tend to follow, he said.
It has resulted in poor absolute performance for many mutual funds that claim to invest in alternative strategies.
For example, long-short funds, some of which strive to provide positive absolute returns regardless of the market, were down 15.75% year-to-date as of Nov. 14, 14.94% for the one-year period and 1.44% for the annualized three-year period, according to Morningstar.
The Standard & Poor's 500 stock index was down 39.33% year-to-date, 39.27% for the one-year period and 9.07% for the annualized three-year period.
Long-short funds obviously did much better on average than the S&P 500, but it's a stretch to say that they are providing the uncorrelated returns investors seek, Mr. Herbst said.
"Eventually, when you have a crisis like we have had ... pretty much everything moves together, with few exceptions," he said.
Having said that, there is a place for alternative investments that are well-thought-out, Mr. Herbst said.
"I think over the longer haul, the asset allocation argument for alternatives remains strong," he said.
Nuveen is jumping into the alternatives space now because so many asset managers are laying off people and delaying product launches, leaving the Chicago-based company an opening to get ahead of the pack, said Howard Schneider, president of Practical Perspectives, an industry consulting firm in Boxford, Mass.
"With the markets down, there are far more opportunities than there were a year ago," he said.
And given that Nuveen is a little late to the alternatives party, it needs to take advantage of all the opportunities it can find, industry experts said.
"I'd say the vast majority of large [fund] complexes have alternatives," said Jeff Tjornehoj, a Denver-based senior analyst with Lipper Inc. of New York.
One of the most well-known companies to have focused on alternative investments recently is Pacific Investment Management Co. LLC of Newport Beach, Calif., he said.
NOT A SURPRISE
That's not surprising given that Mohamed El-Erian, co-chief executive and co-chief investment officer at Pimco, is a former president and chief executive of Harvard Management Co. Inc., the world's largest university endowment. The endowment did very well for Harvard University in Cambridge, Mass., because of its extensive use of alternative investments.
Nuveen, however, has its own alternatives guru.
Mark Anson, president and executive director of investment services at Nuveen, will lead Nuveen Alternative Investments.
He previously served as chief executive of Hermes Pensions Management Ltd. of London, which manages the British Telecom Pension Scheme.
And before joining Hermes, Mr. Anson was the chief investment officer of the $245 billion California Public Employees' Retirement System in Sacramento.
Both the British Telecom Pension Scheme and CalPERS make extensive use of alternatives.
"We're not the first to come to market with this concept," Jamshaud Zovein, head of Nuveen's institutional product development and management team, said of its alternatives unit. "But there is a lot of strength on our bench."
E-mail David Hoffman at [email protected].
