HEDGE funds are to come out of the cold and into the investment mainstream at a major conference in Edinburgh this week.
The National Association of Pension Funds, whose members look after more than £600 billion for UK employees and pensioners, is holding its investment conference in the Edinburgh International Conference Centre (EICC) from Wednesday to Friday.
The organisation will launch new guidance to UK occupational pension schemes endorsing the use of hedge funds as an asset class .
A manual entitled Hedge Funds And Funds of Hedge Funds Made Simple: What A Trustee Needs To Know, suggests that it is acceptable for pension funds to put up to 10% to 15% of total assets in this still controversial asset class.
The guide says hedge-fund investing makes sense as it is a means for pension-fund trustees to even out the risk in their portfolios.
The NAPF guide, which was part-written by Goldman Sachs Asset Management and HFR Asset Management says: “For pension-fund trustees, an important consideration is that many hedge-fund strategies have historically provided [absolute] returns at lower volatility levels than the stock market. In general, hedge funds tend to measure and manage risk over much shorter time horizons, and are less tolerant of losses than in traditional asset classes.
“Most hedge funds are conservatively run and place great emphasis on disciplined risk management procedures. It is common for hedge-fund managers to invest a portion of their own capital in their portfolio, which is a strong indication that they do not want to take on any untoward risk.
“A low correlation with other investments [in a pension fund’s portfolio] has the potential to reduce the overall risk in the portfolio.”
But the document does accept that there are “some areas of risk [associated with hedge-fund investment] which are not desirable.” These include a lack of transparency.
Fees charged by hedge fund managers can also be very much higher than on long-only funds. Typical management fees are 1% to 2% of invested assets, and performance fees are typically about 20% of realised returns.
Last April the Rail Pension Scheme declared it was going to invest more than £700 million in hedge funds, in a move that saw it overtake the BT Pension Scheme as the UK’s largest single investor in the asset class. Railpen, as the scheme is known, controls £14bn in assets. The trustees were advised by Chris Hitchen, now Railpen’s chief executive, to allocate 5% of their assets to hedge-fund investments. Hitchen is chairing the session on hedge-fund investing at this week’s event.
At the NAPF conference, James Montier, of Dresdner Kleinwort Wasserstein, will propose a motion that: “This house believes that pension funds investing in hedge funds will all end in tears”. The motion is being opposed by Ian Morley of Morley, Day Olympia.
Other speakers include David Hunter, of Glasgow-based Arlington Property Investors and Nicola Horlick of Bramdean Asset Management who was last week rebuffed in her attempts to acquire Deutsche Asset Management’s UK business.
Pension fund trustees and fund managers will be urged to look increasingly to alternative asset classes including hedge funds and commodities funds amid growing fears that equities are not going to be capable of delivering the necessary returns meet companies’ pensions promises over the next decade.
Hitchen, chairman of the NAPF investment council, said: “Every pension fund needs to earn a certain return to meet their liabilities, which will continue to roll up. The future return from equities may not be enough to keep pace with the growing pension promise.”
“If you look at historic patterns, you can see a trend of 15 years of feast, followed by 15 years of famine [from equity investing]. That means we could still have 10 years to go before feast days return.”
Hitchen concluded: “These are difficult concepts for the average trustee to grasp. But in future, they will have to diversify their investment strategy and have a much wider basket. In the past, we all thought we knew where the best returns were to be had, and that was stock markets. That is no longer the case.”
This article, bylined Ian Fraser and Teresa Hunter was published in the Sunday Heralds on 13 March 2005
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