Fed Survey Finds Institutional Investors Welcome Risk

Receptiveness to credit and duration risk are on the rise for many pension funds, endowments, and other institutional investors, according to the Federal Reserve's latest survey.

(July 10, 2012) — Institutional investors are increasingly receptive to risk, a survey by the Federal Reserve has found.

The Fed asserted in its quarterly Senior Credit Officers survey on dealer financing terms that one-fifth of dealers indicated an openness to take on additional credit risk on the part of mutual funds, pensions, endowments, and insurance firms. Meanwhile, the Fed’s survey of 22 financial firms, which was conducted between March and May, found a greater willingness to take on duration risk on the part of insurance companies and pension funds.

Introduced in 2010, the study examines the credit environment for the world’s largest investors in the securities financing and derivatives markets.

A previous quarterly Fed survey showed credit terms were unchanged.

The Fed’s latest study also found that demand for government-backed residential mortgage-backed securities increased during the period.

Additionally, while one-fifth of lenders gave better terms to most-favored hedge funds, a quarter of the respondents noted that the use of financial leverage by hedge funds had decreased overall in the past three months.

In January, a monthly Bank of America Merrill Lynch Fund Manager survey voiced a similar theme about investors being more receptive to risk. Institutional investors regained more confidence in the global economy in January than in the last 30 months, and were ready to take on more investment risk, the January survey stated. Michael Hartnett, chief global equity strategist at Bank of America Merrill Lynch Global Research, said: “Investors are tip-toeing rather than hurtling toward higher risk exposure; the US market and high quality cyclical sectors, such as energy and tech, have been the main beneficiaries of lower cash holdings.”

View the Federal Reserve’s full survey here.

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