Global alternative assets under management swell to almost $6.5tr

The world’s largest 100 alternative asset managers saw assets under management increase by 10 percent in 2016, rising to $4 trillion, according to the 2017 edition of Willis Towers Watson’s Global Alternatives Survey.

The survey, which captures long-term institutional investment trends by seven main investor groups across ten alternative asset classes, showed that of the top 100 alternative investment managers, real estate managers have the largest share of assets (35 percent and over $1.4 trillion), followed by private equity fund managers (18 percent and $695 billion), hedge funds (17 percent and $675 billion), private equity funds of funds (PEFoFs) (12 percent and $492 billion), illiquid credit (9 percent and $360 billion), funds of hedge funds (FoHFs) (6 percent and $228 billion), infrastructure (4 percent and $161 billion) and commodities (1 percent).

In terms of the growth by asset classes among the top 100 asset managers, illiquid credit saw the largest percentage increase over the 12-month period, with AuM rising from $178 billion to $360 billion. Conversely, assets allocated to direct hedge fund strategies among the top 100 asset managers fell over the period, from $755 billion to $675 billion.

Notably, insurance company assets managed by the top 100 alternative asset managers grew from 10 percent to 12 percent of total assets.

Luba Nikulina, global head of manager research at Willis Towers Watson, said: “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.

“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 headwinds. It appears that the growing groundswell of negative sentiment that has arisen due to the aforementioned issues is now showing up in the decisions of asset allocators. We have been surprised it has taken this long to observe the trend turn, however this is aligned with our 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.”

Data for the total alternative investment universe, shows that overall alternative assets under management now stand at just under $6.5 trillion, across 562 entries. North America continues to be the largest destination for alternative asset manager allocations (54 percent). Overall, 33 percent of alternative assets are invested in Europe and 8 percent in Asia Pacific, with 6 percent invested in the rest of the world.

The research also highlights that, when looking at the distribution of assets within the top 100 alternative asset managers by investor type, pension fund assets represent a third (33 percent) of assets. This is followed by wealth managers (15 percent), sovereign wealth funds (5 percent), endowments & foundations (2 percent), banks (2 percent) and funds of funds (2 percent). Notably, insurance companies’ proportion among the top 100 alternative asset managers grew from 10 percent to 12 percent of total manager assets.

“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,” said Luba Nikulina.

Pension fund assets managed by the top 100 alternative asset managers now stand at $1.6 trillion, up 9 percent compared to last year’s study, and represents 51 percent of their total AuM. Allocations to illiquid credit by pension funds doubled to 8 percent in 2016, while real estate retains the largest share of pension fund assets with 41 percent. This is followed by private equity FoFs (18 percent), hedge funds (12 percent), infrastructure (8 percent), private equity (7 percent) and FoHFs (5 percent).

“Despite the elevated levels of macro and political concerns, long lease property strategies in Europe have continued to see interest from de-risking pension funds given the expected return differential relative to bonds and higher inflation expectations. We believe this demand is likely to persist as long as bond yields remain low which makes the ability to source attractive assets in this area ever more important,” said Luba Nikulina. “Private equity has also continued to thrive following the period of strong distributions and investors looking for alpha which is becoming more challenging to achieve with the abundance of capital and limited supply of deals contributing to incredibly rich pricing. Investors are now having to find areas of the market that aren’t as expensive or are viewed as contrarian in hopes of achieving successful outcomes.”