More investment groups are holding assets such as in private equity and infrastructure, a study shows, while some caution is coming in about valuations.

The search for yield in the alternative asset areas of hedge funds, private equity and real estate may be getting more demanding but institutions are increasingly making the attempt, according to a study this week.

A survey by research firm Preqin of 530 institutional investors finds that half of them allocate to three or more different alternative assets, rising from 39 per cent doing so as recently as 2015.

Across all asset classes, investors report that diversification is a main reason for investing in alternative assets. Investors also cite reliable income stream as a reason for allocating to real estate, infrastructure and private debt, as well as citing low correlation to other asset classes as a reason to invest in hedge funds and natural resources.

Across most asset classes, larger proportions of investors plan to invest more capital in alternatives than those that plan to invest less in the coming year. This appetite comes in a period of relatively strong performance: across all asset classes, portfolio performance over the past 12 months has met or exceeded investor expectations, the survey found.

As a cautionary note, however, 56 per cent of survey respondents said the equity market is at a peak, and investors’ return expectations for private equity, real estate and infrastructure have fallen from June 2015. 

“With concerns over high asset pricing and its effect on future exit profitability, investors believe that the opportunity for outperformance might be constrained in the future. However, alternatives are nonetheless producing strong risk adjusted returns for many investors, and because assets can help protect investors in the event of a market correction, alternatives remain a mainstay of most investment portfolios,” Amy Bensted, head of hedge funds, Preqin, said.

Evidence from elsewhere in the investment sector suggests that with so much money in the private capital sector in recent years (private debt, equity, real estate and infrastructure) there may be a struggle to enjoy continued strong returns to justify the lack of liquidity. This week, for example, a study by Schroder Adveq found that most US family offices like private equity but overlook those under $100 million of enterprise value deal sizes and those outside the US. It found that 70 per cent invest in private equity, but only 35 per cent put money into smaller-size funds and buyouts. 

Some 79 per cent of institutional investors allocate capital to alternative assets, and half invest in three or more asset classes. The largest proportion of investors have exposure to private equity and real estate funds (57 per cent and 59 per cent of investors respectively).

Across most asset classes, more investors plan to increase investments in alternatives in the coming year than those that plan to invest less, with 43 per cent that plan to invest more in infrastructure.