According to a new white paper by Northern Trust, The New Active Decision in Beta Management, institutional investors are finding alternative indexes to be an attractive investment strategy due to the level of control offered by the investment vehicle.

“As institutional investors face an increasingly challenging environment, they seek increased control and flexibility in their passive mandates and this has largely contributed to the increased interest in alternative indexes,” Northern Trust managing director of asset management, Europe, Middle East and Africa John Krieg said.

Among institutions surveyed for the report, Northern Trust found 3 in 10 had an existing allocation to alternative indices and a further 32 per cent had considered using them.

Of those using alternative indexes, 6 in 10 have increased their allocation in the last two years.

Northern Trust told InvestorWeekly that institutional investors are making active decisions when determining the allocation of their total portfolios, blurring the lines between active and passive management.

“Our survey shows that typically, institutional investors are more focused on beating investment goals,” Northern Trust Asia Pacific managing director Bo Kratz said.

“The traditional questions around active versus passive should really be ‘when active’ and ‘when passive’ as both of these investment vehicles hold the potential for meeting investors goals.

“So in a sense, we should focus not on active versus passive, but on the full spectrum of offerings.”

Northern Trust said that while alternative indexes are in their infancy as an investment option, their increasing take up by institutional investors is likely to continue.

“The adoption of alternative indices is reasonably early and we’ve seen enough take up of it to be a meaningful footprint,” Mr Kratz said.

“But we also see that there is a big need in educating investors around the perceived complexities [around alternative indices] that we actually don’t believe are real complexities. That is always the case as you are breaking new ground.”