Pension Funds Top Alternatives Investors

Total assets managed by the top 100 alternative investment managers globally reached $3.5 trillion in 2014 (up from $3.3 trillion in 2013), according to research produced by global professional services company Towers Watson.

The Global Alternatives Survey, which covers nine asset classes and seven investor types, shows that of the top 100 alternative investment managers, real estate managers have the largest share of assets (33% and more than $1 trillion), followed by hedge funds (23% and $791 billion), private equity fund managers (22% and $767 billion), private equity funds of funds (PEFoFs) (10% and $342 billion), funds of hedge funds (FoHFs) (5% and $214 billion), infrastructure (4%) and illiquid credit (3%).                          

The research, which includes data on a diverse range of institutional investor types, shows that pension fund assets represent a third (33%) of the top 100 alternative managers’ assets, followed by wealth managers (19%), insurance companies (8%), sovereign wealth funds (5%), banks (4%), funds of funds (3%), and endowments and foundations (2%).

Brad Morrow, head of Investment Manager Research, Americas, Towers Watson, tells PLANSPONSOR there are a number of benefits for pension plans, especially since they have a long time horizon. “Expected returns are generally higher, they provide diversity to the portfolio, and investments that are illiquid provide a premium over investments that are liquid that may be accessed by investors with a short-term investing horizon,” he says.

In the ranking of top 100 asset managers by pension fund assets, these increased again from the year before to reach more than $1.4 trillion, according to the survey. Real estate managers continue to have the largest share of pension fund assets with 36%, followed by PEFoFs (20%), private equity (15%), hedge funds (12%), infrastructure (8%), FoHFs (6%), illiquid credit (4%, versus 2% in 2013) and commodities (1%).

“Not all alternatives are created equal. Hedge funds and private equity are very complex and require high governance, while real estate and illiquid credit can be more straightforward,” Morrow said in a statement. “There is also a growing trend of investors differentiating between alternatives and holding a more granular return-driver perspective when building their asset allocations instead of using the traditional asset class approach.”

He explains to plan sponsors that, historically, real estate was the first step into alternatives for pension funds due to familiarity and comfort. “It didn’t require high governance to make investments and provide diversity to the portfolio, so it was a natural process to start,” he says. “These assets have continued to grow, so that’s one reason it’s the largest class of alternatives for pension funds.”

Morrow adds that return drivers for real estate include equity and credit, illiquidity and manager skill, so it is a good vehicle for long-term investors.