UK - Demand for alternative investments from UK pension funds has surged nearly four-fold since 2003, according to Watson Wyatt.
The consultant said that its pension fund clients awarded 61 alternative investment mandates to fund managers in 2005, compared to just 16 in 2003.
In addition, research by Mellon Analytic Solutions has found pension fund weightings in alternative assets such as hedge funds, private equity and venture capital have increased 0.3% by asset value since September 2002 to 1% in September 2005.
Mellon said at the end of September 2005, the lion’s share of pension fund investment in alternative assets was through hedge funds and absolute return mandates.
By asset value, hedge funds/absolute return mandates represented 62.7% of specified pension fund investment in alternatives, while private equity and venture capital combined, accounted for 37.3%.
Watson Wyatt’s European head of investment consulting Kevin Carter added that manager selection activity worldwide had increased markedly in 2005, with the number of selections rising 23% from the year before to 555.
“Generating returns to reduce deficits and implementing risk reduction strategies are now really the top priorities for the majority of pension funds,” said Carter.
That has resulted in many funds moving some assets away from benchmark-sensitive instruments to make meaningful allocations to alternative assets and absolute-return products.
“It is now clear that adding real diversity to portfolios is mainstream thinking,” he said.
Risk budgeting had also become a mainstream discipline meaning that LDI programmes were more feasible - particularly through the use of inflation-linked swaps, said Carter.
“This development is likely to lead to continued growth in the swaps market, which could double in size in 2006, as pension funds and their sponsors find effective ways to manage risk through the careful use of these types of instrument.”
By Damian Clarkson
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