Funds of Hedge Funds Driving Alternative Asset Growth

by Phillip Morton, Investors Offshore.com

13 September 2006

Global alternative assets managed by leading fund managers grew to US$1.26 trillion during 2005, up around 20% from the previous year, according to research by Watson Wyatt, the consultancy firm.

The 'Global Alternatives 99' ranking, conducted in conjunction with Global Alternatives magazine, shows that fund of hedge funds (FoHFs) attracted the most new money in 2005, accounting for 44% (around US$85 billion) of net new inflows, although this was lower than in 2004, when FOHFs accounted for 50% of new money.

Real estate was the next most popular asset class, with 30% of inflows (around US$59bn), followed by private equity fund of funds (PEFoFs) with 21% (around US$42 billion), and commodities with 5% (around US$10 billion).

Total alternative assets in the survey are now split approximately 43% in real estate (US$554 billion), 37% in FoHFs (US$463 billion), 17% in PEFoFs (US$218 billion) and 2% in commodities (US$25 billion).

Roger Urwin, global head of investment consulting at Watson Wyatt, observed that:

"The growth of alternative assets is being driven by a greater recognition of the investment efficiency produced through mixing as many different risk and return drivers as possible in a portfolio."

The survey, which brings together the world's largest alternative players, shows that pension funds globally invested over US$77 billion in these asset classes during 2005, up from US$62 billion in 2004. Real estate remains the most popular asset class among pension plans, having 35% of new inflows, with 34% going into FoHFs, 25% into PEFoFs and 6% into commodities.

Said Unwin: "As alternative assets become more acceptable, pension fund trustees are more prepared to increase the number of different alternative asset classes in their portfolios, thereby maximising performance potential compared with mainstream asset classes, while reducing risk."

According to the survey, pension funds continue to be the largest investor group in alternative assets classes, now accounting for around US$465 billion, or 37%, of the total. High Net Worth Individuals held the third highest amount at US$195 billion, ahead of Mutual Funds (US$165 billion), Insurance companies (US$120 billion) and Foundations/Endowments (US$35 billion).

The substantial fee hurdle associated with certain alternative investments was reinforced by the survey. Within FoHFs and PEFoFs, over 10% (of the sub sample) had base fees in excess of 1.5% per annum.

Unwin noted: "Once performance fees are included, investors will have to work hard to ensure that alternative assets remain a value creation proposition for funds. Indeed some of our clients are using the direct route for investing in these asset classes to reduce fee levels."

According to the survey, RREEF (previously Deutsche Real Estate) remains the largest real estate manager in the world, with US$62.2 billion under management, while Man Investments continues to top the FoHF table with US$458 billion in assets, up from US$35.5 billion in 2004. The survey also revealed that Hamilton Lane Advisors manages the largest proportion of PEFoF assets, managing a total of US$48.793 billion in this area.

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