The 100 largest alternative asset managers saw their assets under management increase by 10 per cent in 2016, rising to about $5 trillion, according to Willis Towers Watson’s 2017 global alternatives survey.

The survey, which looks at long-term institutional investment across 10 alternative asset classes, found real estate managers have the largest share of assets, at 35 per cent and about $1.8 trillion.

Next are private equity fund managers (18 per cent), hedge funds (17 per cent), private equity funds of funds (12 per cent), illiquid credit (nine per cent), funds of hedge funds (six per cent), infrastructure (four per cent) and commodities (one per cent).

Illiquid credit saw the largest increase over the 12-month period, with assets under management rising to about $460 billion from $225 billion. Conversely, assets allocated to direct hedge fund strategies fell over the period, to $855 billion from about $960 billion.

“As capital supply and competition have increased in some segments of the illiquid credit universe, such as direct lending, for example, yields are not always offering sufficient compensation for illiquidity and risk,” said Luba Nikulina, global head of manager research at Willis Towers Watson, in a news release.“At the same time, we have seen some withdrawal of capital from hedge funds in the face of high fees, skewed alignment of interests and performance headwinds.”

The move away from hedge funds has been less notable in Canada, according to Denise Kehler, portfolio strategist at Willis Towers Watson. Alternative credit, while garnering some interest in Canada, has been light on uptake.

“As risk management continues to be a key theme for many institutional investors, alternative investments present an attractive means of diversifying both the drivers of risk and return within portfolios,” said Kehler.

“Canada’s largest public pension plans continue to lead this charge with dominant global presences in real estate, private equity and infrastructure. Indeed, the size of alternative investments by Canada’s largest public pension plans rival those of the largest asset managers in the world. Since other Canadian institutional investors, particularly those with assets of less than $1 billion, may face different challenges in the implementation of alternatives due to higher fees, limited accessibility and higher governance requirements, many are turning to outsourcing as a means to access a wider array of alternatives.

When looking at the distribution of assets by investor type, pension funds represent a third (33 per cent) of assets, followed by wealth managers (15 per cent), sovereign wealth funds (five per cent), endowments and foundations (two per cent), banks (two per cent) and funds of funds (two per cent), according to the survey. Notably, insurance companies’ proportion rose to 12 per cent from 10 per cent of total manager assets.

Pension fund assets managed by the top 100 alternative asset managers now stand at about $2 trillion, up nine per cent compared to last year’s study. Illiquid credit allocations for that group rose significantly to eight per cent over the 12 months, while real estate managers continue to have the largest share of pension fund assets at 41 per cent.

“Despite the elevated levels of macro and political concerns, long lease property strategies in Europe have continued to see interest from de-risking pension funds given the expected return differential relative to bonds and higher inflation expectations,” said Nikulina.

“We believe this demand is likely to persist as long as bond yields remain low, which makes the ability to source attractive assets in this area ever more important. Private equity has also continued to thrive following the period of strong distributions and investors looking for alpha, which is becoming more challenging to achieve with the abundance of capital and limited supply of deals contributing to incredibly rich pricing. Investors are now having to find areas of the market that aren’t as expensive or are viewed as contrarian in hopes of achieving successful outcomes.”