Study: real estate powers booming $4tn alternative asset market

The 100 largest asset managers saw their alternative assets under management (AUM) grow by 10 per cent in the last year to reach $4.0 trillion (£3.1 trillion), according to a Willis Towers Watson survey.

The advisory firm’s Global Alternative Survey also finds that real estate managers account for 35 per cent of all alternative asset holdings – worth $1.4 trillion – as of 31 December 2016. Property has been the most popular asset class for institutional investors for some time, despite returns in the UK and US real estate markets slowing in 2016.

Private equity and hedge fund managers were the second and third largest holders, with assets worth 17 per cent of the global alternatives total and $695 billion and $675 billion, respectively.

Closely following, in terms of global assets under management, are private equity (18 per cent), illiquid credit (9 per cent) and hedge funds (6 per cent).

When it comes to growth, illiquid credit saw the largest percentage increase in ownership among the top 100 asset managers in the last year, with managed assets rising from $178 billion to $360 billion. Hedge fund strategies were the class that fell from favour most in the same time period, with assets allocated dropping from $755 billion to $675 billion.

More capital is anticipated to be withdrawn from hedge fund mangers due to concerns about performance and rising competition from passive strategies, such as a low-cost smart beta approach, said Luba Nikulina, global head of manager research at Willis Towers Watson, in the report.

She continued: “This is providing opportunities for remaining hedge fund investors to renegotiate lower fees. The probability of a downturn in public markets becomes more likely with every year that passes and so investors need to diversify away from traditional equity and credit exposures is also continuing to provide support for hedge funds.”

In the wake of the 2007/2008 financial crisis, many central banks have turned to asset purchasing programs leading to the rude health of the publicly traded bond and equity markets, strengthening the case for alternatives to larger investors, too.

Data for the total alternative investment universe now estimates the total value of assets under management at just under $6.5 trillion. North America remains the most frequent destination of managers' allocations, accounting for 54 per cent, with Europe (33 per cent) and Asia Pacific (8 per cent) behind.

“There was a significant rise in alternative assets last year, markedly stronger than the 3 per cent increase registered in 2015,” summarised Nikulina.

The types of investors and institutions focusing on alternative assets is changing, too. Pension funds account for the majority (33 per cent) of these asset categories, with pension fund assets managed by the top 100 alternative asset managers swelling by 9 percent to hit $1.6 trillion in 2016.

Wealth managers account for 15 per cent of all alternative holdings while sovereign wealth funds, such as Norway’s Norges Bank Investment Management, hold 5 per cent.

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

Richard Tan, head of private markets for Asia at Willis Towers Watson, said that such a change was a sign of “growing interest” from investor groups who traditionally have not held alternative assets who are “looking to lock in alpha opportunities presented by continued volatility”.

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