Institutional investors going direct on alternatives

Institutional investors are investing directly in alternatives rather than going through fund of funds managers, according to Towers Watson.

Towers Watson global head of investment research Craig Baker said the changing approach to alternative investments (such as hedge funds, private equity and direct real estate) reflected a "focus on better fee structures and greater transparency".

He added that the direct alternatives managers selected by Towers Watson over the years had "shown their ability to adapt to the changing environment and generate good net-of-fees performances".

The clients of Towers Watson made 800 manager selection decisions in 2011, which reflected around US$80 billion of assets moved - up 40 per cent from 2010.

Bond mandate selections accounted for US$21 billion, with the allocation to US bonds almost doubling from 2010. Equities mandates accounted for US$24 billion in 2011, with global equities accounting for a third of all equity mandate selections.

"These figures confirm an established trend of investors investing away from local markets, as they seek to diversify their portfolios more globally," said Baker.

There was also an increase in passive investments in 2011, with the Towers Watson clients investing over US$16 billion in the asset class - up 60 per cent from 2010.

"Indexation and smart beta are playing increasingly important roles in investors' portfolios as many new innovations provide efficient access to markets at lower cost," said Baker.

Passive investors can now choose from among a range of options - including insurance and emerging market currency - with the expectation of better risk-adjusted returns, he added.