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Hedge funds: PFZW decision highlights divergent thinking

When Europe’s second-largest pension fund drops hedge funds and announces its new investment strategy will place greater emphasis on intelligibility, the industry takes note.

This was precisely the situation in early January, when the €156bn Dutch healthcare scheme PFZW said it had gradually been selling down its hedge fund holdings. The final disposal was completed in December 2014.

While the argument behind hedge fund exposure is one of diversification, recent pressure from Dutch regulator De Nederlandsche Bank that a fund’s board must have a full understanding of all matters – and control costs – has prompted a rethink. PFZW is simply the latest – and most high-profile – case in Europe.

PMT, the industry-wide scheme for metal workers, had previously announced it would divest the entirety of its €1bn portfolio due to the associated fees, noting that it accounted for close to one-third of all costs from its asset management activities. 

“The slightly positive contribution of the investment was insufficient in relation to diversification benefits,” it said at the time. PMT instead opted to plough the freed-up cash into mortgages, increasing its fixed income exposure at the expense of alternatives. 

PME, another Dutch industry-wide fund providing pensions to metal workers, also sold up and divested, as hedge funds failed to deliver the expected stable returns. Like PMT, it cited costs as a concern and said that its asset management fees, including transactions, had fallen from 0.53% to 0.4% in the wake of its decision. 

But the Dutch industry is divided, and APG continues to believe in the asset class. It cites a net return of 619 basis points over 2013 against management costs of 436bps. “This return, including the result of the currency hedge, amply exceeded our internal benchmark,” Erik van Houwelingen, board member of ABP, tells IPE sister publication PensioenPro. 

Reitze Douma, head of business management at APG, attributes the success to scale and experience. “We know exactly for which services we want to pay fees. The management and performance fees we pay are substantially below the market norm.” 

He says APG often concludes APG-only mandates through its hedge fund subsidiary New Holland Capital. “This not only offers the option for negotiations about fees but means we can enforce transparency and set specific ESG conditions.”

Jan Willem van Oostveen, PFZW’s financial and investment policy manager, also views ESG concerns as one of the driving forces behind his fund’s divestment, noting that the hedge fund sector displayed “a limited concern…. for society and the environment”.

There are other options for those who wish to maintain control over costs and address ethical concerns, best displayed by institutions opting for risk premia strategies they view as internal hedge funds. 

“As well as the cost benefits, we can be more dynamic, and there are no gating problems,” Staffan Sevón of the €34bn Ilmarinen told IPE last year. 

Other benefits highlighted by Sevón included the fact the Finnish mutual could monitor its exposure, and therefore avoid any overlap between the internal hedge fund’s activities and any holdings in other parts of the portfolio. 

It is unlikely the industry will ever come to an agreement on a matter as contentious as hedge fund holdings, given the costs involved – and, for some, the reputational concerns.

The strategies underlying most hedge funds will remain of interest to many pension funds – but they will seek other means of replicating the exposure while reducing risk and retaining greater control. 

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