Several factors lie behind this trend, such as the growing maturation of pension funds in the region and an increased need for portfolio diversification as they grow in scale.

There have been macro-economic drivers, too. With interest rates held at record lows for years to counter crippling financial market downturns, opportunities to source income were scarce. That forced pension funds to diversify into yield-enhancing strategies such as private debt and real assets to meet their liability needs.

The resulting emergence of inflation and subsequent surge in interest rates have also led pension funds to favour alternative solutions as they sought efficient ways to hedge their portfolios against market volatility.

At the same time, regulators worldwide have increased the pressure on investors to meet environmental, social and governance (ESG) targets, most notably to combat climate change amid a push towards net-zero.

Alternative assets such as infrastructure, for example, can offer a more direct route to achieve ESG targets. Infrastructure projects tend to support economic development in areas linked to energy transition, which can give investment managers a say in decision-making to help meet impactful goals.

A multi-asset approach for investors with resource constraints

Alternative investments encompass a vast range of asset classes including hedge funds, real estate, infrastructure, private equity and private credit – each with varying levels of liquidity, risk/return profiles, complexity and accessibility.

To invest in asset classes this diverse, institutions require considerable resources and an operating platform set up to handle complexity. Many turn to external asset managers for support.

Pension funds in Asia Pacific have differing needs when it comes to alternative investing. A multi-asset approach can offer efficient access to a range of alternative opportunities, especially for investors in the early stages of capital deployment or those seeking to actively increase their allocations.

Multi-asset managers need first to understand a client's profile – specifically risk-return objectives, liquidity requirements and investment restrictions – to determine appropriate allocation.

Typically managers require a disciplined asset allocation and risk management framework, a robust private markets platform and an extensive origination and sourcing network to access the top-performing alternative investors and solutions. This is largely beyond the resources of small and mid-sized Asian pension funds.

Single manager strategies in sub asset class

Meanwhile, our engagements with large pension funds with the requisite expertise tend to centre on specific strategies to support their diversification needs, such as best-in-class single manager strategies.

This can range from investing in a core infrastructure fund to providing access to a real estate portfolio in certain segments; or from a beta solution in hedge fund indices to developing a customised private credit portfolio.

For real estate exposure, we’re seeing a rebalancing of interest among investors to living real estate solutions, which include both residential and niche sub-segments such as student accommodation. To address the growing demand, managers with experience in specialised real estate solutions have a competitive edge.

Passive hedge funds to avoid idiosyncratic risk

With a history of low correlation with traditional asset classes, hedge funds are also gaining traction as liquid solutions to help institutional investors manage market volatility while meeting their need to diversify.

Again, selecting best-in-class hedge fund managers, including those based in the US and Europe, requires extensive resources – from due diligence, execution and cash flow management to navigating liquidity needs.

Adopting a passive approach can offer an efficient solution by providing diversified hedge fund exposure at reduced costs and without idiosyncratic fund selection risk.

For example, we’ve partnered with a hedge fund index provider to launch the first products tracking its benchmarks. One portfolio tracks the HFRI 500, a global equal-weighted index capturing 500 hedge funds across multiple strategies including global macro, long-short and futures trading.

In summary, when it comes to investing in alternatives, pension funds can benefit by engaging asset managers with extensive experience in this diverse range of asset classes. For managers, being agile and able to offer customised solutions to investors at differing stages in their alternatives exposure is what matters.

The article was also published in Ignites Asia.