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A systematic asset allocation process starts with the asset owners. Chapters 3 through 6 of this book provide detailed descriptions of major types of asset owners and their investment strategies. This section briefly describes major classes of asset owners. Although the list of asset owners will not be exhaustive, it should be sufficient to highlight the differences that exist among major types of asset owners and how their characteristics influence their asset allocation policies. The following sections discuss four categories of asset owners:

1. Endowments and foundations

2. Pension funds

3. Sovereign wealth funds

4. Family offices

1.3.1 Endowments and Foundations

Endowments and foundations serve different purposes but, from an investment policy point of view, share many characteristics. Endowments are funds established by not-for-profit organizations to raise funds through charitable contributions of supporters and use the resources to support activities of the sponsoring organization. For example, a university endowment receives charitable contributions from its supporters (e.g., alumni) and uses the income generated by the fund to support the normal operations of the university. Endowments could be small or large, but since they have long investment horizons and are lightly regulated, the full menu of assets is available to them. In fact, among institutional investors, endowments are pioneers in allocating to alternative assets.

Foundations are similar to endowments in the sense that funds are raised through charitable contributions of supporters. These funds are then used to fund grants and support other charitable work that falls within the foundation's mandate. Most foundations are long-term investors and are lightly regulated in terms of their investment activities. However, in order to enjoy certain tax treatments, they are required to distribute a minimum percentage of their assets each year. Foundations are able to invest in the full menu of assets, including alternative asset classes.

1.3.2 Pension Funds

Pension funds are set up to provide retirement benefits to a group of beneficiaries who typically belong to an organization, such as for-profit or not-for-profit businesses and government entities. The organization that sets up the pension fund is called the plan sponsor. There are four types of pension funds (Ang 2014):

1. NATIONAL PENSION FUNDS. National pension funds are run by national governments and are meant to provide basic retirement income to the citizens of a country. The U.S. Social Security program, South Korea's National Pension Service, and the Central Provident Fund of Singapore are examples of such funds. These types of funds may not operate that differently from sovereign wealth funds, which are described later in this chapter and in Chapter 5 of this book. The investment allocation decisions of these large funds are controlled by national governments, which makes their management different from private pension funds. Given the size and long-term horizons of these funds, the menu of assets that are available for potential investments is large and includes various alternative assets.

2. PRIVATE DEFINED BENEFIT FUNDS. Private defined benefit funds are set up to provide prespecified pension benefits to employees of a private business. The plan sponsor promises the employees of the private entity a predefined retirement income, which is based on a set of predetermined factors. Typically, these factors include the number of years an employee has worked for the firm, as well as his or her age and salary. The plan may include provisions for changes in retirement income, such as a cost-of-living adjustment or a portion of the retirement income to be paid to the employee's surviving spouse or young children. The plan sponsor directs the management of the fund's assets. While these funds may not match the size or the length of time horizon of national funds, they are still large long-term investors, and therefore the full menu of asset classes, including alternative assets, are available to them.

3. PRIVATE DEFINED CONTRIBUTION FUNDS. Private defined contribution fundsare set up to receive contributions made by the plan sponsor into the fund. The pension plan specifies the contributions that the plan sponsor is expected to make while the firm employs the beneficiary. The contributions are deposited into accounts that are tied to each beneficiary, and upon retirement, the employee receives the accumulated value of the account. The employee and the plan sponsor jointly manage the fund's assets, in that the sponsor decides on the menu of asset classes available, and the employee decides the asset allocation. The menu of asset classes available to these funds is smaller than both national funds and defined benefit funds. Lumpiness of alternative investments, lack of liquidity, and government regulations typically prevent these funds from investing in a full range of alternative asset classes. Historically, real estate is one alternative asset class that has been available to these funds. In recent years, liquid alternatives have slowly become available as well.

4. INDIVIDUALLY MANAGED ACCOUNTS. Individually managed accounts are no different from private savings plans, in which the asset allocation is directed entirely by the employee. Since the funds enjoy tax advantages, they are not free from regulations, and therefore the list of asset classes available to the beneficiary will be limited. In particular, privately placed alternative investments are not normally available to these funds.

1.3.3 Sovereign Wealth Funds

Sovereign wealth funds (SWFs) are funds set by national governments as a way to save and build on a portion of the country's current income for use by future generations of its citizens. SWFs are similar to national pension funds in the sense that they are owned and managed by national governments, but the goal is not to provide retirement income to the citizens of the country.

SWFs have become major players in global financial markets because of their sheer size and their long-term investment horizons. Most SWFs invest a portion of their assets in foreign assets. SWFs are relatively new, and their growth, especially in emerging economies, has been tied to the rise in prices of natural resources such as oil, copper, and gold. In some cases, SWFs are funded through the foreign currency reserves earned by countries that enjoy a significant trade surplus, such a China.

SWFs are large and have very long horizons; therefore the full menu of assets should be available to them. However, because national governments manage them, they may not invest in all available asset classes.

1.3.4 Family Offices

Family offices refer to organizations dedicated to the management of a pool of capital owned by a wealthy individual or group of individuals. In effect, it is a private wealth advisory firm established by an ultra-high-net-worth individual or family.

The source of income for a family office can be as varied as the underlying family that it serves. In some cases, the capital is spun off from an operating company, while in other cases, it might be funded with what is known as legacy wealth, which refers to a second or third generation of family members that have inherited their wealth from a prior source of capital generation. The financial resources of a family office can be used for a variety of purposes, from maintaining the family's current standard of living to providing benefits for many future generations to distributing all or a portion of it through philanthropic activities in the current generation. Family offices tend to have relatively long time horizons and are typically large enough to invest in a full menu of assets, including alternative asset classes.