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Demand for alternative assets continues to be strong, as pension funds around the world seek to diversify their portfolios and capture alpha through absolute return strategies.

According to research by Global Investor magazine and Watson Wyatt, alternative assets managed for pension funds by the world’s largest 99 investment managers grew by 40 percent last year, climbing from $586 billion in 2006 to $822 billion in 2007.

The majority of alternative assets managed on behalf of pension funds – 62 percent – are invested in real estate, followed by fund of hedge funds (FoHFs) and private equity fund of funds (PEFoFs). Infrastructure and commodities remain less popular, but investment in these two asset classes is growing.

The movement of pension assets into alternative asset classes has occurred despite investment managers’ inconsistent performance and the high costs associated with these investments. As managers work harder to justify their fees, an increased focus on risk, transparency and direct investment in private equity and hedge funds is likely.