Sticking with the programme
Non-traditional investments had been enjoying growing popularity with Swiss pension funds until last summer, when the heavy losses of Long-Term Capital Management - and its shareholders UBS and Credit Suisse Group - gave them pause for thought. LTCM was not the only loser. The two most popular non-traditional funds of funds, CreInvest and Alpine Select, reported falling net asset values followed by sharply widening and persistent discounts in the listed stocks. They dropped 30%, only a few points less than the Swiss market.
Shareholders were left confused. Both funds had been heavily promoted as low-correlation investments. But the first time investors needed a hedge the funds failed the test.
Despite public concern, the pension funds remain faithful. Basel-based retailing group Manor, for example, holds 3% of its pension fund assets of Sfr35m (e22m) in non-traditional investments. Chief financial officer Wilfred Stoecklin told a pension fund meeting that his scheme would stick with this strategy. Although commodities produced disappointing results, the non-traditional assets, including four hedge funds, fulfilled the scheme's expectations for diversification.
The Versicherungskasse of the City of Zürich is also continuing with its programme and plans to invest 2.5% of its assets in hedge funds. But because of recent events the evaluation process will focus even more closely on conceptual matters, says Armin Braun, head of the Versicherungskasse. With a nod to UBS, he adds that internal rules would forbid an investment in a black box like LTCM. Nor would the scheme go into leveraged funds, because they tend to reinforce a portfolio's volatility.
Stefan Hepp, a partner in Strategic Capital Management, which advises 11 schemes on hedge funds and private equity, finds no unrest" among his clients. Pension funds that are involved in hedge funds have already examined the issues in depth and will not be put off by isolated events like the LTCM crisis, he says. But, because the such events increase the need for explanation and communication, Hepp expects pension fund managers to delay new investments in hedge funds and focus instead on private equity as a more accepted category of non-traditional investment.
Nor has the Swiss branch of the UK's ED & F Man Group had any redemptions. With performance of 40% (in dollars) its two publicly offered funds had the best results of any non-traditional investment in Switzerland and had their high season in the autumn, when stock markets dropped the most. ED & F Man is gaining a reputation as a well-disciplined investment company. But, as communications officer Andrea Schärer told IPE, its small marketing team isn't targeting the pension funds actively and its products are not yet widely known.
While the professionals stick to their guns, there is public support for political groups that wish to tighten investment policies for pension funds and to outlaw uncovered short positions in both direct and indirect investments. "Foolishness" is the reaction of Zürich's Braun. Such legislation would rule out not just hedge funds but also a wide range of commonly used operations and derivatives strategies. Uncertainty about the legislative position means VZ Zürich will probably be forced to postpone its first investments in hedge funds.
The regulation is likely to be introduced as a prescription (Verordnung) by the Bundesamt für Sozialversicherung (BSV), thus avoiding public hearings. The BSV was not available for comment.
This get-tough policy has always been event-driven, starting in 1994, when the Landis & Gyr scheme suffered big losses. This resulted in a collection of detailed rules on how pension funds can use derivatives. An opposing trend wants to widen freedom of operations but to enforce boards' responsibility for results and processes.
The two regulatory philosophies are incompatible and thus paralysing both pension funds and legal supervision."