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10% of large UK schemes now in hedge funds

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UK – Some 10% of large UK pension funds now invest in hedge funds, according to a survey by Mercer Investment Consulting.

“The survey shows the use of alternative investments continues to increase, in particular active management or so-called ‘alpha’ strategies,” Mercer said.

“On average, 7% of schemes now invest in hedge funds and 7% employ an active currency manager. For larger schemes, the figures increase further, with almost 10% investing in hedge funds and around 15% using an active currency manager.”

“Investment in alternative assets such as hedge funds and active currency is likely to increase further this year, as trustees have become more comfortable with these strategies as a way to diversify risk and enhance performance,” said investment strategy head Andy Green.

The survey also found that the average allocation to bonds remains the same as last year, at 35%.

The firm surveyed more than 425 UK defined benefit pension schemes with more than £177bn in assets reveals and that the average allocation to bonds has increased by just four percentage points in the last three years.

“While it may seem surprising that bond allocations have remained stable at a time when pension schemes are maturing, trustees are concerned about the level of current bond yields and are finding other investment markets more attractive,” Green said.

The survey found that the average allocation to equities had dropped from 63% in 2005 to 62% this year. Investment in UK equities has decreased from 37% in 2005 to 35%.

Green noted: “Trustees are offsetting the effect of concentration by reducing their exposure to UK stocks and allocating more funds to international equity markets.”

Mercer also found that 10% of funds expected to consider introducing some form of cash-flow matching or liability-benchmarked strategy in 2006, either through physical bonds, swaps or liability-driven mandates.

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