Institutional investors and financial advisers are still enthusiastic about alternative investments, despite their weak performance in 2008, not to mention their correlation to stocks and liquidity issues, Morningstar found in a survey.

More than 60% of institutions and advisers believe that alternatives will be as or more important than traditional investments over the next five years. A majority expect to allocate 10% or more of their portfolios to alternatives in that time, and 25% plan to allocate a full quarter of their assets to alternatives. The most popular alternative investment class is hedge funds.

Asked why they like alternative asset classes, the top three reasons cited remained the same as last year’s survey: portfolio diversification, absolute returns and exposure to different investment techniques, such as arbitrage and shorting. That said, institutional investors and advisers said they are paying far closer attention to liquidity, transparency of holdings and investment strategy, correlations and absolute returns.

“One of the most interesting findings from our survey is that both institutions and advisers continue to view alternative investments optimistically, despite their questionable performance, correlation and liquidity during last year’s global downturn, as well as the high-profile scandals that rocked the hedge fund industry,” said Steve Deutsch, director of the pension, endowment and foundation database at Morningstar.

“Again this year, the majority of participants indicate that they plan to increase allocations to alternatives, but with greater scrutiny and due diligence given to those investments,” Deutsch said.

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