GLOBAL - Pension funds across the globe poured more than US$62bn into alternatives in 2004 with property being the most popular asset class, according to new research from Watson Wyatt.
Almost half the total investment in alternatives went into property (US$30bn) while US$17bn was in private equity and US$16bn in fund of hedge funds (FoHFs).
A breakdown of the alternative assets managed on behalf of pension funds world wide revealed 49% is in property, 38% in private equity and 13% in FoHFs.
“Property endures as a popular alternative asset class despite illiquidity and cost issues,” said Roger Urwin, global head of investment consulting at Watson Wyatt. “Indeed many property managers have adapted their offerings, including the introduction of indirect vehicles, to make it easier for pension funds to invest in them.”
The survey identified geographical differences in alternatives preferences with pension funds in North America and Europe most interested in property followed by private equity and FoHFs respectively, compared to Asia Pacific, where FoHFs were most popular.
According to the results, FoHFs accounted for about half of all new money invested in alternative assets classes globally in the 12 months to December 2004, amounting to US$81bn - up from US$41bn in 2003.
Commenting on the 24% growth in investment in FoHFs, Urwin said FoHFs provide diversification, potential for added alpha and flexibility in risk management but warned: “The capacity of some of the managers of these strategies to continue to deliver good performance is in doubt given the size of new money flows occurring.”
The majority of the new inflows into property stemmed from European and North American pension funds while private equity represented 17% of new inflows, mainly from North American funds, Watson Wyatt said.
“Private equity is slowly gaining acceptance among pension funds globally as a logical addition to their portfolios,” Urwin commented. “However, the governance budget required to be successful with private equity remains large.”
According to the survey, Deutsche Real Estate remains the largest property provider in the world, with US$57.6bn under management, while Man Investments tops the hedge fund of funds table with US$35.5bn in assets, up from US$21.4bn in 2003. Pacific Investment Management Company was named the biggest commodities player with US$6.7bn and Pacific Corporate Group manages the most in private equity fund of funds at US$22bn.
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