It seems that investments in fixed income are losing the popularity contest among plan sponsors, as activity for managers in the asset class is expected to nose dive in the coming months, according to a survey conducted by Casey, Quirk & Associates of 74 U.S. and Canadian consulting firms.

A mere 14% of respondents said that they are expected to focus on core and core-plus bond strategies this year. Last year, 28% of respondents anticipated activity in this arena.

"The primary issue with bonds is that the upside is tiny, and the downside is very large," said Yariv Itah, partner with Casey Quirk of the anticipated slow down in the asset class. "The fixed-income markets are expected to provide very low returns, interest rates can only move upward, and diversified funds-of-hedge funds are viewed as alternatives to bonds with better return expectations and similar risk characteristics."

Investments in hedge funds, particularly fund-of-funds, will garner the most attention with 70% of polled consultants expecting to focus on search activity the asset class.

"No less than 100% of midsize consultants plan to focus on hedge funds," Itah said. "This is significant because up until now, the large consultants led the way in hedge fund investing. The midsize consultant stepping in shows that the second wave of hedge fund investing is on its way."

Institutional investors will also increase their investments in alternatives due to the recent subprime meltdown, Casey Quirk said.

"Distressed strategies are expected to be in demand in 2008, perhaps because some believe the aftermath of the subprime crisis and the potential recessionary environment offer attractive investment opportunities for these strategies," Casey Quirk noted in its report.

Even more noteworthy is the fact that 90% of plan sponsor consultants expect to increase their activity in the alternative investments space this year-a 50% increase according to the survey.

Similarly, a recent survey of institutional investors' appetites conducted by Bear Stearns and the Government Finance Officers Association backs up the findings of Casey Quirk's report. Bear Stearns found that more than 50% of polled pension funds intends to allocate a portion of their assets to alternative investment (See IMW, 3/17/08).

Another asset class expected to see increased activity is international equity, with the results showing that it will be the second most common search this year.

In the small and midsize consulting arena, 60% expect to see an increased focus on international equity mandates, 40% of large consultants will focus on the asset class. Corporate consultants are expecting activity for international equity to triple from last year's, with 60% of respondents anticipating growth.

This article initially appeared in IMWeekly.com, a SourceMedia sister publication.