The research and consulting firm surveyed 32 pension funds with at least $100 million in assets from China, Australia, Singapore, Hong Kong, Taiwan, South Korea, and Thailand in July.
The growth in allocations was led by South Korean pension funds. For instance, the National Pension Service, Jeonju, increased alternative allocations by 5.5 percentage points and the Korea Teachers' Pension Fund, Naju-si, increased its exposure by 4.1 percentage points between 2020 and 2022, the report said.
In 2022, alternatives made up 10.1% of total retirement assets in the Asia ex-Japan region, the highest the asset class has been since 2018.
"The weak macroeconomic environment in 2022 shifted some interest towards investments with capabilities to hedge against inflation while providing good returns," Cerulli Associates analyst Shaun Ng said in an email.
Hedge funds in particular were a popular choice among the pension funds that were surveyed. Around 44% of the respondents said they would increase allocations to hedge funds over the next two years, the survey found.
"Hedge funds are a complex asset class that heavily favors reputable managers with consistent performance," Ng said.
"About 40% of the top 50 global hedge fund managers have set up local offices in Singapore... The fact that global hedge fund managers are looking to set up in Singapore signifies a growing demand in Singapore as well as the region," he added.
Also, the pension funds ranked inflation hedging as a top reason for the increase in alternatives allocation followed by high absolute returns and a reliable income stream.
However, 41% of the pension funds surveyed said they had a limited understanding of alternatives and a third said they lacked the expertise to manage these assets in-house.
"While Asian pensions continue to boost their alternatives portfolios, it will likely take many more decades for them to build sufficient in-house expertise in the area. Hence, alternatives remain a greenfield for asset managers," Ng said.
In terms of sector exposure, technology ranked the highest with 62.5% of respondents expressing interest, followed by data and cloud management at 59.4%.