Study shows alternative investments are a hard way to make an easy living

While it definitely beats digging a ditch, charging 2-and-20 is a hard way to make a living.  Ask lawyers, consultants or anyone else in the high-end service economy that charges by the hour or basis point, and they’ll all likely agree that it’s a tough gig trying to justify fees, especially when they’re pretty steep.

Unfortunately for hedge fund managers and other alternative investment professionals, the same mantra applies, particularly when it comes to pension funds, who while increasingly looking to tap into the alternative investment talent pool aren’t so gung-ho about paying for the privilege.

Indeed, Towers Watson’s latest Global Pension Asset Study shows that while pension funds are increasingly diversifying into alternative investments, schemes remain skeptical about the fees charged.

The study (click here to download), which includes responses from 271 asset managers, notes that pension funds are increasingly looking at – and allocating to – a variety of alternative investment mandates, a trend reinforced in last year’s survey (click here to read’s summary last year).

At the same time, however, they are increasingly concerned that what they’re paying for – i.e. active management – is worth it, particularly when compared to what they feel they can get via traditional market returns.

The good news is that they’re still allocating, and then some. The study shows that global institutional pension fund assets in the 13 major markets increased by 12% during 2010 to reach a new high of $26 trillion. Global pension assets now amount to 76% of the global GDP, compared to 71% in 2009 and significantly higher than the equivalent figure of 61% in 2008, according to the report.

Within these figures, North America continues to account for the largest amount of pension fund assets in alternatives, followed by Europe and Asia. The share of alternative investments in global pension fund portfolios has jumped to an average of 19% in 2010 from 7% in 2000.

What’s more, the report finds that more of its pension fund clients now accept the need for greater diversification, as more heavily diversified portfolios experienced lower losses during the financial crisis compared to those exposed mainly to equities.

But, and here’s the kicker to hedge fund managers everywhere, it’s not necessarily hedge funds that pensions are throwing money at. Indeed, real estate had the highest number of managers (44) in the top 100 ranking, accounting for 55% of assets, followed by private equity funds of funds (PEFoFs), which ranked second by AuM in the top 100, accounting for 18% of assets, down from 21% last year.

The chart below shows the increase in the number of real estate managers taking part in the survey.

For fund of hedge fund managers, meanwhile, also not good news: Among the top 100 managers in the survey, their share fell to 12% from 13%. The top 100 managers account for 87% of all pension fund assets in the survey.

To be sure, the report focuses more on rankings and key findings than it does on providing context and analysis regarding why pensions are less keen on hedge funds and more interested in other types of “alternatives”.

Nonetheless, two key takeaways from the report are that schemes, while committed to alternatives, aren’t necessarily committed to hedge funds or funds of hedge funds and if they are going to cough up cash, they are certainly not willing to blindly pay a premium for it.

All of which flies in the face of something we used to hear a lot of, but don’t hear so much anymore: the hedge fund-specific adage that so long as returns were net of fees, the fees themselves didn’t matter so much.

We gather the older adage of “you get what you pay for” better applies these days, so long as those getting paid are accountable.

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One Comment

  1. Absolute Wealth
    September 13, 2011 at 11:03 am

    Nineteen percent of advisers have as many as half of their clients invested in alternatives. And according to the study, they have been correct in doing so. The study revealed that firms using alternative investments are more likely to have a greater number of clients and assets under management (AUM) compared with those who use little to no alternative investments.

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