Fees just as important as diversification

While institutional investors continue to focus on diversity they do so with an increased demand for more alignment and lower cost, according to Willis Towers Watson.

The global advisory firm's Global Alternatives Survey found the top 100 alternative investment managers' total assets managed reached US$3.6 trillion ($4.78 trillion and up three per cent) on the prior year.

Willis Towers Watson Australia's senior investment consultant in diversifying strategies team, Nick Kelly, said the alignment of interests and value for money contributed to the blurring between individual asset classes.

"Fees tend to be much higher in alternative asset classes, compared to the traditional classes and this pushes investors to explore various implementation routes which can potentially help reduce fees, such as separate mandates and co-investments," Kelly said.

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"This is particularly relevant in the Australian market where there remains a significant focus on reducing fees.

"Large Australian investors with higher governance levels continue to build their internal teams and focus on direct investments in alternative asset classes as a way of deploying larger amounts of capital."

Kelly said the alignment and lower cost drivers meant there was increased scrutiny on the overall value proposition from asset managers to asset owners.

"Achieving this would have a positive knock-on effect for managers of attracting assets from other investors, such as insurers and sovereign wealth funds, wanting to make the most of market volatility and associated alpha opportunities; particularly given the current lack of clear beta opportunities," he said.

The report also found that pension fund assets represented a third (34 per cent) of the top 100 alternative managers' assets, followed by wealth managers (19 per cent), insurance companies (10 per cent), sovereign wealth funds (six per cent), banks (two per cent), funds of funds (two per cent), and endowments and foundations (two per cent).

According to the research, Macquarie Group is globally the largest alternative asset manager with over US$95 billion in assets under management.