Sovereign wealth funds, endowments, pension plans -- across the board, institutional investors are rushing into alternative asset classes to escape the purgatory of low returns they expect from public markets over the next few years. But a new report from State Street Corp.’s Center for Applied Research says these investors are failing to make decisions that will help them meet their individual objectives, manage risk and handle the greater portfolio complexity these moves will bring. “Irrespective of their stated goal, institutional investors are exhibiting a herd mentality by increasing their exposure to alternatives,” says Suzanne Duncan, the report’s Boston-based author. “While there is nothing wrong with alternatives, what’s worrisome is that investors feel unprepared to handle the risks and complexity.”

Based on input from more than 3,000 financial industry participants in....