Institutional Investors’ Allocations to Alts Gather Steam

U.S. firms dominate ranks of world’s 100 biggest alternative asset managers

The coffers of the world 100 biggest alternative asset managers swelled to $4 trillion in 2016, a 10% increase over the previous year, Willis Towers Watson reported Monday.

Overall alternative assets under management stood at some $6.5 trillion across 562 managers surveyed, with North America the main destination for 54% of allocations, followed by 33% in Europe and 6% in Asia/Pacific.

The annual WTW survey seeks to capture long-term institutional investment trends by seven main investor groups across 10 alternative asset classes.

The data for 2016 showed that among the top 100 managers, real estate managers had a 35% share of assets, more than $1.4 trillion, followed by:

  • Private equity fund managers: 18%, $695 billion
  • Hedge funds: 17%, $675 billion
  • Private equity funds of funds: 12%, $492 billion
  • Illiquid credit: 9%, $360 billion
  • Funds of hedge funds: 6%, $228 billion
  • Infrastructure: 4%, $161 billion
  • Commodities: 1%, $21 billion

According to the research, pension funds represented 33% of assets allocated to the top 100 alternative managers. Wealth managers followed with 15%; insurance companies with 12%; sovereign wealth funds with 5%; and endowments and foundations, banks and funds of funds each with 2%.

“Although the alternative asset manager universe continues to be dominated by pension fund assets, as solutions have continued to evolve that are better aligned to investor needs and incorporate lower cost structures, we have seen growing interest from other investor groups such as insurers looking to lock in alpha opportunities presented by continued volatility,” WTW’s global head of manager research Luba Nikulina said in a statement.

Pension fund assets managed by the top 100 alternative asset managers in the sector amounted to $1.6 trillion in 2016, up 9% from the 2015 study.

Real estate strategies remained pensions’ the most popular alternative asset class, with 41% of assets, followed by private equity, with 18%. At the same time, illiquid assets’ share this year double to 8%.

A recent study found that U.S. private equity continues to attract investors.

U.S. alternative asset managers occupied 68 spots in this year’s ranking of the 100 largest managers. Bridgewater Associates and AQR Capital Management were the biggest managers in direct hedge funds, with $116.8 billion and $69.2 billion.

TH Real Estate, an affiliate of TIAA’s investment management arm Nuveen, and Blackstone were the dominant real estate managers, with $105.5 billion and $102 billion.

Blackstone was also the biggest direct private equity and largest fund-of-hedge-funds manager, with $100 billion and $71 billion.

And Prudential Private Placement Investors managed $81 billion in illiquid credit.

In terms of growth by asset classes among the 100 biggest managers, illiquid credit experienced the biggest percentage increase year over year, with assets under management increasing from $178 billion to $360 billion.

In contrast, investors cut back on their allocations to direct hedge fund strategies among the top 100 managers, with assets falling by $80 billion to $675 billion.

“As capital supply and competition have increased in some segments of the illiquid credit universe, such as direct lending for example, yields are not always offering sufficient compensation for illiquidity and risk,” Nikulina said.

“At the same time, we have seen some withdrawal of capital from hedge funds in the face of high fees, skewed alignment of interests and performance headwind.”

Nikulina said this trend turn was aligned with her firm’s “long-held view that the hedge fund industry needs to change, with those willing to offer greater transparency and display value for money likely to prosper going forward.”

A new study by Credit Suisse offered a different perspective on institutional investors’ interest in hedge funds.

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