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Hedge Fund Observer: UK pension funds lagging behind Continental Europe in hedge fund investments

04/06/2006

UK pension funds continue to be much more exposed to equities (62%) than their Continental European counterparts (33%), which have, however, taken a definite lead in hedge fund exposure. According to Mercer Investment Consulting's latest survey of European pension funds asset allocation, 13% of Continental European pension funds now invest in hedge funds, compared to 7% in the UK. The survey of 426 UK pension funds with assets totalling €258 billion (£177 billion) found that pension funds investing in hedge funds had an average allocation of 6.9% to those alternative assets. In Continental Europe, the 148 funds with assets totalling €106 billion that were surveyed showed generally higher allocations to this asset class. "The proportion of funds investing in hedge funds has the potential to rise even further this year, by up to 5 percentage points across Europe, as pension funds become more comfortable with this asset class", commented Andy Green, European director of consulting policy at Mercer IC. "Pension funds are also showing more interest in hiring single manager hedge funds, typically equity market neutral and long/short funds, in addition to the more diversified fund of hedge funds. This is particularly true in Continental Europe." Property remains a much more popular alternative to equities and bonds than hedge funds. A quarter of the UK pension funds said they were exposed to this asset class. This proportion rises to 62% in continental Europe. "Property has been a long-standing alternative investment to equities and bonds for pension funds", said Mr Green. "With prices having risen strongly in many domestic property markets, we are now seeing much greater interest in international investment as pension funds seek to enhance returns." Allocation of funds in various European countries Country/asset class Equities (%) Bonds (%) Other (%)* France 28 60 12 Germany 31 56 13 Ireland 60 33 7 Netherlands 33 63 4 Spain 40 38 22 Switzerland 33 52 15 UK 62 35 3 *Other assets include alternative investments such as property, hedge funds, private equity etc and cash. Source: Mercer Investment Consulting J.L.

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