Hedge in the middle
Just over half (52%) of the respondents to this month's Off The Record survey stated that their pension fund currently invests in hedge funds. Some 66.5% do so via fund of funds, while 58.5% do so directly.
All those respondents using hedge funds made their first investment between 2003 and 2008, and the average proportion of their total assets invested in hedge funds was 5.25%. The largest individual investment was that of a French fund, at 10% of total assets.
The majority (66.5%) of respondents did not think traditional consultants were in a position to provide good advice on hedge funds. "[There are] very few specialists at traditional consultants," commented a Swiss fund, and a UK fund felt it was "better to use specialists".
Respondents were evenly split on whether performance from their hedge fund portfolio had met expectations since they invested. A Dutch fund said it had seen a "decent return [and] low correlation with the market". Others were less satisfied, with a Swiss fund noting: "2004 to 2007 [were] above performance targets, [but] since 2008 [we have seen] disappointing results." An Austrian fund lamented that performance "is far below [the] promised ‘absolute' and hedge fund returns"
Over 83% of respondents felt hedge funds to be a separate asset class. "If designed correctly, a portfolio of hedge fund strategies can perform very differently from traditional risk classes," said a Danish fund. An Irish scheme added: "[They have] different risk/return profiles and low correlation with other asset classes."
A UK fund that did not believe hedge funds to be a separate asset class commented: "Single strategy long/short equity is part of our equity absolute return strategy, [while] fund of hedge funds is part of our allocation to alternative strategies."
Half of respondents said their pension fund's strategic allocation to hedge funds would remain the same over the next three years. For one Swiss fund, this was partly because it is difficult to get money out - "limited liquidity, side pockets, reduced expectations" - but also partly because hedge funds are "not a bad investment in a low interest rate environment". A quarter of respondents said that their strategic allocation would increase. "Macro hedge funds or global tactical asset allocation is on our ‘wish list' for a while," stated a Dutch fund.
Some 16.5% said there would be a reduction, and an Austrian fund commented: "[We will be] reducing if [there is] no pick-up in returns. [It] is an exercise far too expensive to pursue with [the] results achieved so far." The remaining 8.5% did not have a strategic allocation to hedge funds.
Almost half of respondents said they did not currently invest in hedge funds, although all of them had done some research into the area. Some 82% stated they had no plan to invest in hedge funds. "After 2008, it [became] clear that hedge funds, generally speaking, [are] nothing [but] ‘the emperor's new clothes'," said a Swedish fund. "[They are] very free and often illiquid mandates, with very little client insight and hefty fees," a UK fund added. "Other asset classes have more immediate interest."
The most common reason given by respondents for not investing in hedge funds was that they found the fees too high (63.5%). Some 36.5% felt the due diligence to be too onerous, while the same proportion found fund of fund fees too high. Over 27% believed the net returns too low and the risk to reputation too high, with 18% not convinced by the diversification argument.
Among the 18% of those not currently investing in hedge funds but planning to do so in the future, one US fund commented: "We have decided to try a small allocation to global macro for diversification and tactical asset allocation. The universe of hedge funds is a business model, each style belongs within an asset class. Alone they are not an asset class."