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A number of consultants are urging clients to consider increasing their allocations to distressed debt, credit opportunities and real assets. At the same time, they are saying that hedge fund risks should be closely monitored.

According to Money Management Letter, a CIN sister publication, Wurts & Associates, NEPC and Strategic Investment Solutions are looking at distressed debt with renewed vigor. Wurts is recommending clients put about half of next year's commitments into distressed strategies through mortgage, commercial real estate and corporate debt strategies, said Director of Research Eric Petroff. NEPC President Mike Manning noted that when the market is down, credit tends to outperform. The firm is recommending a diversified credit exposure across several asset classes. Some of SIS's clients are working with

private equity firms to build up funds to buy or establish mortgage servicing companies, said Managing Director Pete Keliuotis. The firm is also recommending strategies that buy mortgage paper, commercial mortgage backed securities and loan investments, as well as strategies focused on consolidation and operational improvement in the smaller portion of the banking sector, he added.

Petroff is encouraging clients to increase their allocations to real assets, including real estate, energy, infrastructure and selected clean technology funds as these tend to perform well during periods of inflation. SIS is also recommending real asset strategies to clients, but more for diversification benefits than inflation hedging, said Keliuotis.

Cynthia Steer, chief research strategist at Rogerscasey, suggests clients use bond managers to identify impaired securities and separate those into large workout pools to be sold off. Private equity firms might be especially attracted to these securities she said. "The oxymoron of 2008 is that one can get a double digit return for a low-duration asset," Steer said.

Wurts is advising against arbitrage and absolute

return hedge funds, as they will likely experience low returns because of their use of leverage in the credit markets. Bruce Graham, managing director at Clearbrook Investment Consulting, is telling clients to reduce exposure to hedge funds in some cases because of the uncertainty in redemptions. He's suggesting clients decrease their 20% allocations to alternatives and reallocate to credit opportunities, such as asset-backed lending funds. For a list of consultants and their recommendations, see related chart.

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