New research by Towers Watson shows that institutional investors continue to diversify their investment portfolios into alternative assets through direct funds rather than funds of funds. The data show that in 2012 its clients, that included pension funds, sovereign wealth funds and insurance companies, allocated 70 percent more assets to hedge fund and private market strategies than in 2010, reaching $12 billion.

"Throughout the past five years, the alternative fund managers we've placed in client portfolios have shown their ability to adapt to the changing environment to generate good net-of-fees performances. Larger institutional funds are likely to continue to invest in funds directly for most alternative asset classes, rather than via funds of funds, as investors continue to focus on better fee structures and greater transparency," said Zainul Ali, head of manager research, Americas, at Towers Watson.

In 2012, the number of hedge fund mandates awarded to direct funds continued to increase, especially in the macroeconomic, fixed income and reinsurance areas. Similarly, in private markets, real estate, private equity and infrastructure, direct funds received the vast majority of assets. During the year, there was particular interest in infrastructure globally, with three times more assets being awarded to investment managers by Towers Watson's clients than in 2011.