In 2010, Towers Watson’s clients showed renewed interest in hedge funds, with demand for fund of hedge fund mandates rising back to 2008 levels. Mandates for direct hedge funds now account for 60% of all hedge fund searches, with equity, fixed income and insurance strategies being the most popular.
“We believe in the ability of highly skilled hedge funds to adapt to a changed environment and generate good performance for our institutional investor clients,” said Baker. “We believe that the larger institutional funds will continue to move to investing directly rather than via funds of funds. However, funds of funds can still be an ideal solution for many smaller and governance constrained investors.”
Last year, Towers Watson’s clients awarded over double the number of direct real estate mandates than the previous year, while the level of private equity mandates, both direct and fund of funds, remained at the same low levels as 2009, reflecting the fact that fewer funds came to market in that period. Direct allocations remain more popular than fund of funds and accounted for 75% of private equity selections in 2010, confirming a consistent trend over the last four years. Private funds focusing on distressed debt were also popular with investors during 2010. The company awarded few infrastructure mandates in 2010, reflecting a lack of attractive opportunities in the asset class.
“2010 was another challenging year for managers in private markets, notably private equity managers coming to terms with the end of cheap, readily available debt and rising prices -- it is not surprising that few funds were raised,” said Baker. “A noteworthy development of the year was the interest in distressed debt, which was the second most popular mandate, after direct real estate, in the private market area.”
Towers Watson’s clients also continued to opt for passive mandates during 2010, which have increased year over year in the past four years.
“In the passive area, investors are increasingly looking for more efficient market exposures and are reviewing the indices underlying their existing investments, with a view to seeking better alternatives,” added Baker. “There has been a great deal of development within indexation, which is increasingly offering passive investors a broader range of options and the expectation of better risk-adjusted returns.”
While still accounting for more than US$18 billion worth of selections, the number of bond mandates fell 30% in 2010, after the surge in 2009, largely due to better investment opportunities in equities. Global and emerging market bond mandates dominate, each accounting for over 25% of all bond selections, while U.S. and Australian bonds account for 19% and 11%, respectively. Globally, manager selection activity at Towers Watson exceeded 800 selections in 2010, reflecting more than US$57 billion of assets moved.