Pension Funds Increase Allocations to Alternatives

“For almost all of the past 10 years of this research, we have seen increasing allocations to alternative assets by a wide range of investors,” said Zainul Ali, head of manager research, Americas, at Towers Watson Investment Services. “Not only has the appeal of alternative assets broadened to include insurers and sovereign wealth funds, but the range of alternative assets has also increased beyond real estate and private equity to include direct hedge funds, infrastructure and commodities. Not surprisingly, allocations to alternative assets by pension funds now account for around 19% of all pension fund assets globally, up from 5% about 15 years ago.”

The “Global Alternatives Survey” shows that pension fund assets represent more than one-third (36%) of the top 100 alternative investment managers’ assets, followed by wealth managers (19%), insurance companies (9%), sovereign wealth funds (6%), banks (5%), funds of funds or FoFs (3%), and endowments and foundations (2%).

The survey also shows that for the top 100 managers, North America continues to be the largest destination for alternative capital (46%), with infrastructure as the only exception where more capital is invested in Europe. Overall, 37% of alternative assets are invested in Europe, 10% in Asia Pacific and 7% in the rest of the world.

In a ranking of top 100 asset managers by pension funds, these assets increased by around 8% from the year before to reach $1.3 trillion. Real estate managers continue to have the largest share of pension fund assets with 39%, followed by private equity funds of funds or PEFoFs (20%), private equity (14%), hedge funds (9%), infrastructure (9%), funds of hedge funds or FoHFs (7%) and commodities (1%).

Compared on a like-for-like basis, pension fund assets managed by infrastructure managers, private equity managers and PEFoFs managers increased by 14%, 12% and 7% respectively. During the same period, pension fund assets managed by the top FoHFs and hedge fund managers grew by 13% and 12%, respectively. Pension fund assets managed by real estate managers declined by 3%.

"We continue to see pension funds globally putting their faith in alternative assets to help deliver more reliable risk-adjusted returns at the total-fund level, as evidenced by the growth, significant in some instances, in all but one asset class. Further to the increased acceptance of alternative assets in their portfolios, we expect pension funds to continue making larger allocations and to access these assets differently. In particular, we expect a continuing shift toward investing via individual managers rather than funds of funds - particularly in hedge funds and private equity - as these managers improve their structures and are seen as a more efficient implementation route than fund-of-funds vehicles," said Ali.

The survey was conducted for the year through December 2012 to rank the largest alternative investment managers. The survey includes 578 investment manager entries comprising 90 in real estate, 71 in fund of hedge funds, 58 in private equity fund of funds, 175 in hedge funds, 87 in private equity, 62 in infrastructure and 35 in commodities. For real estate, commodities and infrastructure, individual managers are included. The majority of the data (533 entries) come directly from investment managers, with the remainder coming from publicly available sources.

A copy of the survey can be found here.