Direct alternatives, global mandates in demand, finds Towers Watson

The number of alternative asset mandates awarded by Towers Watson’s clients worldwide to direct fund managers increased in most asset classes in 2011, continuing a five-year trend.

Last year the number of hedge fund mandates awarded to direct fund managers was nearly three times higher than via fund of funds, which have fallen by two-thirds (by number of mandates) during the past five years.

Similarly, last year the number of direct private equity mandates awarded by the company’s clients was almost four times higher than via fund of fund managers, with the number of these mandates down by half compared to five years ago.

Last year the number of mandates awarded by Towers Watson’s clients to direct real estate fund managers was almost ten times higher than via fund of funds managers.

Craig Baker, global head of investment research at Towers Watson said: “Throughout the past five years the direct alternative fund managers that we have put into client portfolios have shown their ability to adapt to the changing environment and generate good net-of-fees performances. Larger institutional funds are likely to continue to invest directly for most alternative asset classes rather than via funds of funds as investors continue to focus on better fee structures and greater transparency.”

Institutional demand for global equity and bond mandates has remained high during the past five years, while demand for UK-focused equity and bond funds has fallen substantially.

There were half as many UK bond and UK equity searches in 2011 than in 2010. Last year the company’s clients awarded three UK bond mandates compared with 28 in 2007. Similarly, the number of manager searches for UK equity managers fell from 12 five years ago to four last year.

Global and emerging-market bond mandates continued to be popular in 2011, but US bonds were the most popular bond mandate among the company’s clients, almost doubling compared to the previous year. In total, bond mandate selections accounted for $21bn in assets invested last year.

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