Traditional approaches to asset allocation aren’t cutting it anymore, say the nation’s institutional investors in a survey conducted by Pyramis Global Advisors, a Fidelity Investments company.

More than one-third of the 632 investors polled (35%) said they believe that traditional investing approaches will not be effective in 10 years. Even for institutional investors who became more “tactical” or opportunistic in their investment decisions, the result has fallen short of their expectations. Almost one in three U.S. pension plans, or 29%, believe they will not achieve their return assumptions, up from 18% in 2008.

Seven in 10 pension managers believe picking the right market or region will the primary source of future returns, according to the survey findings. Twenty-nine percent said they would definitely or likely increase the use of more aggressive “sub-asset classes,” such as emerging markets equity and debt.  And more are leaning toward alternative investments, with 44% saying they expect to increase illiquid alternatives, such as private equity, and 27% saying they may add hedge funds.

“We found that many institutions are increasing or diversifying their risk, changing the way they execute on investment decisions and some are completely rethinking long-held beliefs about asset allocation,” Mike Jones, president and CEO of Pyramis, said in a statement.

One-third of the respondents said that traditional asset allocation models will shift toward fixed income or immunized strategies, such as liability-driven investing, or LDI, over the next decade, up from 19% who said so in 2008.

Among respondents expecting new asset allocation models to prevail in 10 years, 26% said they will shift significantly to alternative asset classes or factor-based strategies where allocation is based on specific risks. Almost one in 10 (9%) believe they will shift significantly to absolute return strategies.

The use of derivatives among institutional investors increased, with 60% of U.S. plans employing them, up from 44% in mid-2008. Almost half (48%) report using derivatives to tactically adjust market exposure and 42% said they utilize them for “downside protection” or “tail risk.”

The survey was conducted during June and July of 2012. It included 632 institutional investors in 16 countries who collectively oversee more than $5 trillion in assets.