Which Alternative Is Winning Most Institutional Money?

One alternative asset class has been winning the most money from a range of large investors, but each type of institution has its own idea about which sector takes second place.

(July 9, 2012) – Real estate has collected the largest amount of assets from three institutional investor bases, but these allocators were divided on where to put the next chunk of their money, according to a survey published this week.

Real estate dominates the alternative asset portfolios of pension funds, insurance companies and sovereign wealth funds (SWFs) as managed by the world’s largest fund managers according to a survey by consultant Towers Watson – in association with the Financial Times. These firms took 40% of pension funds’ alternatives portfolios, 60% from insurance firms’ and 32% from SWFs.

The second placed asset class for these groups was not uniform, however, with pension funds and insurance firms favouring private equity fund of funds –  they allocated 18% and 12% respectively of their alternative portfolios that were held with the top 100 companies. With a 4% allocation, SWFs eschewed this option, choosing direct investment to the asset class with an assured 25% slice of the sector’s aggregate alternatives portfolio destined to the top 100 companies.

SWFs also showed a keenness for hedge funds, the survey showed. At the end of 2011, 23% of assets allocated to the top 100 alternative managers were held in hedge funds.

Towers Watson said this theme concurred with a trend outside the top 100 managers.

Endowments and foundations chose a different path – 33% of their aggregate alternatives portfolios were allocated to direct private equity investments by the top 100 firms, followed by 18% into hedge funds. Fund of hedge funds and real estate both took a 16% allocation at the end of last year, the survey showed.

Craig Baker, global head of research at Towers Watson Investment, said: “The on-going economic uncertainty is likely to encourage investors away from simply holding equities as their main growth asset and towards a greater use of alternative assets. We think the effort to diversify in this way is worthwhile but investors need to be cautious about choosing the best and most efficient vehicles, not forgetting the increasing number of cheaper and lower governance routes for improving investment efficiency such as using Smart Beta.”

To access the full survey, click here.

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