Pension funds increase alternative asset allocations

The global pension fund assets held by the 100 largest asset managers dealing with pension funds rose to US$1.3 trillion last year, up 8% from 2011.

The Towers Watson Global Alternatives Survey finds that about 19% of global pension fund assets are now invested in alternatives, compared to 5% in 1997.

Real estate managers hold the biggest share of pension fund assets (39%), followed by private equity funds of funds (20%), private equity (14%), hedge funds (9%), infrastructure (9%), funds of hedge funds (7%) and commodities (1%).

The survey also reveals that the total global assets managed by the top 100 alternative investment managers amounted to $3.1 trillion and pension fund assets represented the largest share of those assets (36%).

Wealth managers came in second, comprising 19% of global alternatives investment. These were followed by insurance companies (9%), sovereign wealth funds (6%), banks (5%), funds of funds (3%), and endowments and foundations (2%).

Pension funds will turn even more to alternative assets in the coming years, but they will access these assets differently, says Craig Baker, global head of research at Towers Watson Investment.

“In particular we expect a continuing shift towards 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,” he explains.

Covering seven asset classes and seven investor types, the survey shows that direct real estate funds made up the biggest share of investments (34%). Direct private equity funds were the second most popular investment (23%), followed by direct hedge funds (20%), private equity funds of funds (10%), funds of hedge funds (6%), infrastructure (4%) and commodities (4%).

The research reveals that in terms of geography, the biggest destination for alternative capital is North America (46%). Infrastructure is the only exception, where more capital is invested in Europe. Overall, 37% of alternative assets are invested in Europe and 10% in Asia Pacific. Seven percent is invested in the rest of the world.