Alternative assets around the world reached $1.26 trillion in 2005, up 20% from the previous year, according to data from Watson Wyatt, InvestorsOffshore.com reports.

While the increase in hedge funds-of-funds slowed to 44% during the year, down from a 50% increase in 2004, they attracted the most new money into alternative asset classes, taking in $85 billion in 2005.

Real estate was the next most popular, taking in $59 billion, up 30% from the previous year. Next were private equity fund-of-funds, taking in $42 billion (up 21%), followed by commodities, which reaped $10 billion (up 5%).

In terms of total assets, real estate investments hold the most ($554 billion, or 43% of the total), followed closely by hedge funds-of-funds ($463 billion, or 37% of the total).

"The growth of alternative assets is being driven by a greater recognition of the investment efficiency produced through mixing as many different risk and return drivers as possible in a portfolio," said Roger Urwin, global head of investment consulting at Watson Wyatt.

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