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Pension funds allocate to alternative assets despite crisis

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Alternative assets managed on behalf of pension funds by the world’s largest investment managers diminished by around one per cent to USD817bn in 2008, according to research produced by

Alternative assets managed on behalf of pension funds by the world’s largest investment managers diminished by around one per cent to USD817bn in 2008, according to research produced by Watson Wyatt in conjunction with the Financial Times.

This contrasts with a 40 per cent increase in the amount of alternative assets pension funds invested with top managers during 2007, compared to 2006.

Carl Hess, global head of investment consulting at Watson Wyatt, says: ‘In spite of poor short-term performance, the demand for alternative assets by pension funds aiming to diversify their portfolios and access skill remains. As a result, inflows continued last year which, combined with their illiquid nature and less negative performances than pure equity, resulted in only a marginal decline in assets. However, according to our research allocations to alternative assets have continued to rise and now account for 17 per cent of all pension fund assets globally, up from seven per cent ten years ago.’
 
An analysis of the top 100 alternatives managers shows that real estate managers dominate, accounting for around 58 per cent of assets (down from 62 per cent in 2007), followed by private equity fund of funds, fund of hedge funds, infrastructure and commodities. They also dominate the top ten ranking with eight managers in that list.

As with real estate, hedge funds assets (13 per cent of assets) also diminished in 2008 with both private equity (20 per cent of assets) and infrastructure (nine per cent of assets) being the beneficiaries, while commodities assets remained relatively small (less than half a per cent of assets).
 
Hess says: ‘It is not all doom and gloom in the alternatives world and long-term investors have been selectively investing in certain strategies, notably private equity, in the knowledge that in times of adversity good managers have made significant money for investors in the past and could well do so again. Infrastructure managers have also increased their pension fund assets under management during the past year. While there are certainly good investment opportunities in this area, investors should be very wary of the structure of some of these mandates with careful attention being paid to the net of fees proposition.’
 
Data from the wider survey shows that at the end of 2008, the top 50 real estate managers, fund of hedge funds and private equity fund of funds managed USD485bn (USD512bn in 2007), USD123bn (USD146bn in 2007) and USD177bn (USD139bn in 2007) respectively.  Infrastructure and commodities remain smaller, but are becoming easier for pension funds to access with the top ten managers in these areas being responsible for USD72bn (USD43bn in 2007) and USD9bn (USD16bn in 2007) respectively.
 
According to the broader research, the majority (52 per cent) of alternative assets managed on behalf of pension funds are invested in North America, while a third are invested in Europe and 11 per cent in Asia-Pacific. In terms of domicile, two-thirds of managers are based in the US, while a quarter are based in Europe with the remainder being based in Asia-Pacific.
 
At the top of the rankings ING Real Estate Investment Management is the largest real estate manager of pension fund assets with USD40.9bn, while HarbourVest Partners tops the private equity fund of funds table with USD22.4bn. Blackstone Alternative Asset Management manages the largest proportion of fund of hedge funds assets on behalf of pension funds, with a total of USD13.5bn. Macquarie Group tops the Infrastructure table with USD44.4bn while Pimco is the leading pension fund commodities manager with USD3.4bn.

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