Allocation to alternative investments is expected to increase in the long term, but investors should exercise caution when choosing the best and most efficient vehicles.
As alternative assets continue to increase globally, real estate managers reported the largest share of assets, according to a study from Towers Watson.
The Top 100 alternative investment managers worldwide managed a total of $3.3 trillion last year, up from $3.1 trillion in 2012. Among the 7 asset classes and 7 investor types, real estate managers held 31% of total shares, or $1 trillion, followed by private equity fund managers (23% or $753 billion), and hedge funds (22% or $724 billion).
“For almost all of the past 11 years of this research we have seen increasing allocations to alternative assets by a wide range of investors,” Craig Baker, global chief investment officer at Towers Watson, said in a statement. “Not only has the appeal of alternative assets broadened to include many more insurers and sovereign wealth funds, but the range of alternative assets has also increased beyond the likes of hedge funds and infrastructure to include real assets, illiquid credit and commodities.”
The largest investors in alternative assets was pension funds (33%), followed by wealth managers, insurance companies, sovereign wealth funds, banks, fund of funds, and endowments and foundations.
According to the report, North America was the largest destination for alternative capital, accounting for 45%. The only asset class for which Europe had more investments than North America was infrastructure, which only accounts for 4% of total global alternative assets.
“Pension funds globally continue to put their faith in diversity via increasing alternatives assets to help deliver more reliable risk-adjusted returns at the total fund level,” Baker said. “This is evidenced by the growth, significant in some instances, in all but one of the asset classes in the past 5 years. 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 premia.”
Baker expects allocation to alternatives will continue to increase in the long term. Towers Watson expects investments will likely be implemented by specialist managers rather than fund of funds. According to the data, the top 25 managers of fund of funds managed $100 billion in 2013, which was down 16% from the previous year.
He reminds that while diversifying into alternative assets is wise, investors should be cautious when choosing the best and most efficient vehicles.
“Throughout the crisis, investors continued to move away from simply holding equities as their main growth asset and to make greater use of alternative assets; and we expect this to continue in the future,” Baker concluded.