| UK Pension funds looking at hedge funds with caution |
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| 22/08/2004 | |
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Even with the current media buzz surrounding the hedge fund industry, most UK pension funds still prefer to keep hedge funds at arm's length – for the time being. Only 16 percent of the 94 UK pension funds with combined assets of over £77 billion surveyed by Pioneer Alternative Investments are currently invested in hedge funds, but 33 percent say they are looking into the asset class for a future investment. Pension funds not considering hedge funds as an investment are primarily concerned with their high level of undefined risk and the high fees such an investment carries. Risk diversification is an important selection criterion for investors. This is shown by the vast majority of institutions already invested in absolute return strategies (86%) that prefer fund of hedge funds to single strategy fund. Commenting on those findings, Nigel Meir, Head of Sales and Distribution at Pioneer Alternative Investments qualified of "outdated" the perceptions of some investors. "'This could result in certain schemes failing to fully understand the risk reduction strategies that hedge funds can bring to efficient portfolio management", he said. Albeit usually lauded for their high level of decorrelation with other asset classes, hedge funds are mainly bought for their absolute return characteristics, with almost three quarters of pension funds saying they invest in hedge funds to enhance the performance of their portfolio. Only a quarter said they invest in hedge funds for defensive reasons. Poorly performing hedge funds have also undercut the hope of many investors lately. The Hedge Fund Research (HFRX) Global Index was down for a fourth month in a row in July for the first time, and looks poised to add a fifth month of negative return in August. Under such conditions, heavy hedge funds management fees might act even more as a put off for many investors. Nigel Meir still remains confident that the best has to come for absolute return strategies. "The fact that close to 50% of UK pension funds are now investing in or considering investing in hedge funds shows that the industry is making huge strides in persuading scheme managers and trustees of the benefits of hedge fund vehicles", he said. Last week, the £345 million London Borough of Brent superannuation fund has announced it would tender a £17 million hedge funds mandate, with Mercer Investment Consulting as advisor. It will the first move of the pension scheme in this asset class. Local authority funds are amongst the least invested pension schemes in alternative asset classes, with a level of alternative investment around 1.2% of their portfolio. Julien Laplante |
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