The £3.8bn (€5.2bn) Avon Pension Fund has merged its three hedge fund mandates into a single, £165m portfolio overseen by JP Morgan Asset Management (JPMAM).
The benchmark 5% allocation to fund of hedge funds by the local government pension scheme (LGPS) was previously managed by Gottex Fund Management, Signet and Stenham Asset Management.
After reviewing its hedge fund strategy in 2014, the scheme began tendering for a single-manager bespoke fund of funds mandate, with JPMAM beating 47 other applicants.
The review, conducted by consultancy JLT, assessed the scheme’s target allocation and if it should retain three managers or move to single mandate with either a single or multi-strategy approach.
Avon then selected JPMAM to run a bespoke mandate that will cater to its specific objectives and restrictions.
Its hedge fund returns lagged behind other asset classes in recent years, with Signet the scheme’s worst performing manager in the year to April 2015 with -4.1%.
Gottex and Stenham provided 1.8% and 5.3%, respectively, with the latter the only hedge fund manager beating the 3.6% return benchmark.
In comparison, the scheme’s global equity managers Invesco and State Street Global Advisors returned 21.6% and 21.3%, respectively.
Overall, the scheme returned 13.5% in the year to April, mainly down to its 35% allocation to overseas equities.
The pension fund first began investing in fund of hedge funds in 2007, however, in 2013 cut its strategic allocation to the asset class from 10% to 5% after being underwhelmed by the sector’s performance in general.
JLT’s review also considered whether Avon should amend its return expectations.
However, the scheme decided to retain its 5% investment in hedge funds over concerns listed assets were close to fully valued.
“We would expect alpha-driven investments such as hedge funds and diversified growth funds to play an increasingly important role in return generation over the coming three years, particularly if beta returns are lower looking forward,” the scheme’s investment report said.
The scheme’s decision to retain its fund of hedge funds strategy is in contrast to rhetoric coming from UK central government that the LGPS should focus on fees.
In 2014, the then Conservative and Liberal Democrat coalition government suggested banning the use of fund of funds for both hedge funds and private equity mandate. Instead, it proposed the 89 LGPS in England and Wales invest directly, together, through a collective vehicle.
Concerns over the cost/return balance from hedge funds has led to high profile divestments, including two LGPS in the West Midlands and London.
Figures from Preqin showed fund of hedge funds outperformed its primary hedge fund benchmark, with the former returning 5.2% over the last 12 months to the latter’s 4.7%.