Dutch civil service scheme ABP has started to reduce its allocation to hedge funds, with a view to end its strategic allocation to the asset class by the end of next year.

The pension fund does not exclude investing in “hedge fund-like strategies” tactically in the future, but it will leave decisions on this to its asset manager APG.

Hedge funds “repeatedly score less well” on issues such as returns, costs, risk and sustainable investing, an ABP spokesperson told IPE.

ABP paid €331m in performance fees to hedge fund managers last year, even though returns on the asset class were negative when measured in euros.

ABP already started reducing its hedge fund allocation, currently 4.1% of its total portfolio, in 2018. Though the fund moved €8bn in hedge fund investments from an external manager to its asset management arm APG last year, ABP still had roughly €20bn invested in the asset class in 2020.

The implementation of the decision to exit hedge funds is proceeding at a slower pace than expected, according to the scheme, “because it is a complex and time-consuming exercise”.

The disinvestment in 2020 will be processed administratively this year, after which the official allocation to hedge funds will finally be reduced.

“The reduction of our hedge fund portfolio will become more visible over the next couple of years,” the spokesperson said. The proceeds of the sales will be re-invested in existing investment categories.

“We will use the opportunity to evaluate which of these investments we can execute in house as this would decrease costs and increase transparency and control,” the spokesperson said.

ABP does not rule out the idea that it will continue to use hedge funds or “hedge fund-like strategies” after 2022. “We expect we will invest less in hedge funds because of our decision to remove the asset class from our strategic allocation. But we do not have specific targets on this,” the spokesperson added.

The “hedge fund-like strategies” will preferably be executed by APG, instead of expensive external managers. The question is, therefore, whether APG has the right skills to execute complex strategies such as global macro or long/short equity market-neutral strategies.

“Many hedge fund strategies are becoming more mainstream and can be executed cheaper internally. APG takes care of a professional composition of their investment teams,” the ABP spokesperson said.

Accountability body

ABP’s accountability body, which advises and scrutinises the pension’s board and which had repeatedly criticised the fund’s hedge fund investments in the past,  understood the decision to no longer invest in hedge funds, said Sophie Faes, president of the body’s investment committee.

“We have warned, however, that possible investments in hedge funds in the future may become less visible because these will no longer be reported as a separate category. We will keep watching closely whether ABP will indeed continue to report in a transparent fashion about their hedge fund investments,” she added.

ABP said it will remain transparent about its future use of hedge funds. “So we will continue to report about this in our annual report under the asset categories where these strategies, called alternative alpha sources, will be managed.”

A second point of possible concern for the accountability body is whether ABP will remain in control of its hedge fund investments as it will leave future allocation decisions to its asset manager APG.

“As a consequence, ABP’s board will no longer be in charge of these investments. Some members are not sure this setting is desirable, but in general we trust the intention of the board and the investment expertise of APG.”

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