Pensions Increase Investments in Alternatives

The Global Alternatives Survey, conducted in conjunction with the UK’s Financial Times shows pension fund assets represent one-third (33%) of the top 100 alternative managers’ assets, followed by wealth managers (18%), insurance companies (9%), sovereign wealth funds (6%), banks (3%), funds of funds (3%), and endowments and foundations (3%). Allocations to alternative assets by pension funds now account for around 18% of all pension fund assets globally, up from 15 years ago when it was 5%, says Brad Morrow, head of manager research, Americas, based in New York.

In the ranking of top 100 asset managers by pension fund assets, these increased by nearly 2% from the year before to reach nearly $1.4 trillion. Real estate managers continue to have the largest share of pension fund assets, with 35%, followed by private equity fund of funds (PEFoFs) (20%), private equity (15%), hedge funds (12%), infrastructure (8%), fund of hedge funds (FoHFs) (7%), illiquid credit (2%) and commodities (1%).

“Pension funds continue to search for new investment opportunities, and alternative assets have been an area where they have made, and continue to make, very significant allocations. While remaining an important investor for traditional alternative managers, pension funds are also at the forefront of investing in new alternatives, for example, in real assets and illiquid credit,” says Morrow.

“Pension funds globally continue to put their faith in diversity via increasing alternative assets to help deliver more reliable risk-adjusted returns at the total fund level. Most of the traditional alternative asset classes are no longer really viewed as alternatives, but just different ways of accessing long-term investment themes and risk premiums. As such, allocations to alternatives will almost certainly continue to increase in the long term but are more likely to be implemented directly via specialist managers rather than funds of funds, although funds of funds will also continue to attract assets, as borne out by this research,” Morrow adds.

The survey covers seven asset classes and seven investor types, and shows that of the top 100 alternative investment managers, real estate managers have the largest share of assets (31% and over $1 trillion), followed by private equity fund managers (23% and $753 billion), hedge funds (22% and $724 billion), PEFoFs (10% and $322 billion), FoHFs (5% and $173 billion), infrastructure (4%) and commodities (2%).

In addition, the research shows that for the top 100 managers, North America continues to be the largest destination for alternative capital (45%), with infrastructure as the only major exception (with more capital invested in Europe). Overall, 38% of alternative assets are invested in Europe, 7% in Asia-Pacific and 10% invested in the rest of the world.

The survey looked at the largest alternative investment managers in 2013 and includes 589 investment manager entries comprising 85 in real estate, 66 in fund of hedge funds, 55 in private equity fund of funds, 162 in hedge funds, 90 in private equity, 55 in infrastructure, 32 in commodities, 24 in illiquid credit and 20 in real assets.

More information about the survey can be found here.