| Pension funds set to increase exposure to hedge funds |
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| 15/10/2006 | |
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The San Diego pension system invested €140 million with Amaranth Associates a year ago. It believes it may only get €56 million back. Yet the lacklustre performance of hedge funds has not dampened interest in the group on the part of Continental European pension funds, industry analysts say. A number of industry studies show that while only a low percentage of pension schemes are satisfied with funds-of-hedge-funds performance, they plan to increase their allocation to these funds in the next two years. Among the fallout of the Amaranth blowup was AP7, a Swedish pension fund, invested in EIM, the Swiss-based fund-of-funds, with exposure to Amaranth. "Yet the fact remains that interest rates remain low and institutional investors, including pension funds, are looking for diversification and hedge funds are one of the places they are turning to," said Stéphane Scimone, CFA and director at Fitch Ratings. "The search for diversification was lost with an important global sell-off in mid and small caps. Many hedge funds were pursuing closely correlated strategies, and so the benefits of diversification were lost in May." Perhaps, but not the search for alpha. The proportion of Continental institutions naming themselves as hedge fund investors increased from 26% in 2005 to 35% in 2006 and another 10% say they plan to begin investing in hedge funds in the coming months, according to a study by Greenwich Associates, a consulting firm. In France and Switzerland almost half of the institutions invest in hedge funds. "Strictly in terms of the percentage of institutions investing in hedge funds, these Continental countries outpace every market in the world, except Japan," said Makus Ohlig, a consultant at Greenwich. "And even though 1% or 2% allocations seem small, they do amount to €200 million per institution." Interest up, satisfaction down Despite growing interest in the asset class, less than a quarter of pension schemes that invest in funds-of hedge-funds are satisfied with their investment returns, according to a survey by Mercer. The study notes that only 23% are satisfied 28% are not. When asked to rate overall satisfaction with their funds of hedge funds manager, the study of more than 180 large pension schemes worldwide found less than half (47%) were satisfied. Areas of concern expressed by investors include fees, transparency and the level of client service. The survey also found that only 58% of participants understand the fund manager's investment approach. The percentage was particularly low in Europe and Japan, where these funds have not been available for a long time. The respondents' return expectations range from 4% to 6% over the domestic cash rate. Investors participating in the Mercer study have a 5% median allocation to hedge funds; this is expected to increase to 7.8% in two years. Investors who are increasing allocation outnumber those decreasing allocations by almost five to one. Yet many pension fund managers remain on the sidelines, preferring to watch the evolution of this relatively new asset class. "The returns, especially after the fees, are not that attractive," said Kerim Kaskal, Head of Asset Management at Sweden's AP3, with €21.2 billion in assets under management. "We are not about to invest in them." Fund of hedge funds tend to be used as a diversifier of equities for pension funds investing across an increasingly large span of assets, but shying away from direct hedge fund investment, deemed too risky. Said Ohlig: "A large proportion of Continental pension funds, banks, insurance companies, and other institutional investors are taking significant steps away from the somewhat tradition-bound investment practices that characterised the industry for the previous 50 years" and turning to fund of funds, even as returns have been less than stellar. V.B. |
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