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Pension funds continue move into alternatives

Pension funds globally invested over USD 62 billion in alternative asset classes during 2004, according to a new survey by Watson Wyatt.

The survey, conducted in conjunction with Global Investor Magazine, found that property attracted almost USD 30bn, private equity USD 17bn and fund of hedge funds (FoHFs) USD 16bn. Of all the alternative assets managed for pension funds globally, 49 per cent is in property, 38 per cent is in private equity and 13 per cent is in FoHFs.

"Pension funds continue to reduce their reliance on equities as they find suitable alternative sources of risk," said Roger Urwin, global head of investment consulting at Watson Wyatt. "The message of diversification is definitely getting through."

According to the survey the most popular alternative asset class for pension funds in North America and Europe is property followed by private equity and FoHFs respectively. By contrast, in Asia Pacific there is little interest in property among pension funds with fund of hedge funds in first position.

The survey, which brings together the world's largest alternative players in fund of hedge funds, private equity fund of funds, property and commodities, identified net gains across these asset classes of USD 161 billion during the year and brings the total of alternative assets to around USD1 trillion.

In the survey, FoHFs account for approximately half of all new money invested in alternative asset classes globally in the 12 months to December 2004 amounting to USD 81bn (up from USD 41bn in 2003). This constitutes a 24 per cent growth of FoHF assets during the year and brings total assets under management to USD 338bn.
The survey also included data broken down into other types of investor with FoHFs obtaining 82 per cent of alternative asset funds received from high net worth individuals during the year, 76 per cent of funds received from 'other' institutions (including governments, endowments, supra-nationals, Central Banks etc) but only around one third of the funds received from insurance companies and mutual funds.

"Fund of hedge funds have provided a useful addition to a number of our clients' portfolios, giving them not only diversification and the prospect of added alpha, but also flexibility in risk management," said Urwin. "However, 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."

In the survey, the asset class with largest percentage gain in 2004 was commodities with a 52 per cent rise of USD 5.6bn, bringing total assets to USD 11bn, approximately 1 per cent of all total assets in the survey.

"Although commodities is not major asset class, interest from institutions, especially mutual funds, is steadily increasing." commented Urwin.

Property managers account for the most assets totalling USD 457bn and registered a 10 per cent growth rate during 2004. The asset class also accounts for 30 per cent of all new inflows, which stemmed mainly from European pension funds but also those in North America.

"Property endures as a popular alternative asset class despite illiquidity and cost issues," added Urwin. "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 also revealed that private equity managers account for USD 193bn, having grown their assets by 14 per cent during the same period and were responsible for 17 per cent of new inflows mainly from North American pension funds.

"Private equity is slowly gaining acceptance among pension funds globally as a logical addition to their portfolios," said Urwin. "However, the governance budget required to be successful with private equity remains large."

The survey included examination of regional trends, which showed that new inflows in 2004 in North America came mainly from pension funds flowing largely into property followed by private equity then hedge funds. In Europe, pension funds also provided most of the new money through investment mainly in property.  In Asia-Pacific, the biggest flows were into hedge funds from the other financial institutions category and into property from mutual funds.

According to the survey, Deutsche Real Estate remains the largest property provider in the world, with USD 57,6bn under management, while Man Investments continues to top the hedge fund of funds table with USD 35,5bn in assets, up from USD 21,4bn in 2003. The survey found Pacific Investment Management Company to be the top commodities player with USD6,7bn.

The survey also revealed that Hamilton Lane Advisors holds the greatest amount of advisory assets in private equity with USD39,3bn, while Pacific Corporate Group manages the most in private equity fund of fund assets, with USD 22bn under management.

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