Towers Watson clients ramp up alternatives exposure
Towers Watson clients invested four times as much capital in alternative investment strategies as they did five years ago.
Data from the investment consultancy indicates that its clients allocated just over $12.5 billion into alternatives in 2013. Real estate attracted the most interest with roughly $4 billion of inflows, of which 25% was smart beta. Direct hedge funds attracted $3 billion while infrastructure accounted for $2 billion. Approximately $1.5 billion was invested in direct private equity while illiquid credit saw inflows totalling $1 billion.
“Throughout the past five years the alternative fund managers that we have put into client portfolios have shown their ability to adapt to the changing environment to generate good net-of-fees performances. Larger institutional funds are likely to continue to invest in funds directly for most alternative asset classes rather than via funds of funds as investors continue to focus on better fee structures, greater transparency and smart beta options. Indeed, there were only three funds of hedge funds mandate selections in 2014, which is a demonstration of this point,” said Craig Baker, global head of investment research at Towers Watson.
Institutional investors are growing their exposures to hedge funds and other alternatives strategies. Deutsche Bank Global Prime Finance’s Alternative Investment Survey predicts hedge fund Assets under Management (AuM) could reach $3 trillion by the end of 2014, up from $2.6 trillion last year. These inflows are being driven primarily by institutional allocators, which account for approximately two thirds of hedge fund AuM.
Consultants such as Towers Watson, Mercer and Albourne Partners are also encouraging clients to invest in hedge funds. A Barclays Prime Finance study in 2013 found investment consultants control $830 billion of the total capital invested in hedge funds. The clout of consultants, often at the expense of funds of hedge funds is undeniable. A Goldman Sachs survey last year found 65% of pension funds and 45% of insurers employed consultants when making hedge fund allocations, with 90% and 76% of respondents confirming they used consultants to help them with operational due diligence and research respectively.
The Towers Watson data also showed clients made twice as many new investments in smart beta strategies in 2013 with $11 billion invested across 180 portfolios, compared with $5 billion in 2012. In total, Towers Watson clients have allocated $32 billion across 500 smart beta strategies.
“It is no surprise to us that smart beta strategies are being implemented at this rate, given their inherent relevance for most institutional investors. Interestingly it has taken some time to get to this point given that we started developing the concept in 2000 as part of our work on structured alpha, and then in more detail in 2002 as beta prime. While it is satisfying that our clients have been able to benefit first from a range of smart beta strategies, we are somewhat concerned about the proliferation of products now on the market that claim to be smart beta, particularly in the equity area,” commented Baker.