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€2.4bn Dutch pension fund abandons hedge funds after loss

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NETHERLANDS - The €2.4bn pension fund of TNO, the Dutch institute for applied technical research, has decided to divest its 2.9% hedge funds portfolio after it generated a 7.2% loss, underperforming its benchmark by 13.4%.

In its annual report for 2011, the scheme said: "Because research has shown we can get a comparable risk/return profile with traditional asset classes, we have said goodbye to hedge funds for the time being."

Overall, the pension fund returned 6.6% last year, mainly due to its hedge of the interest risk on its liabilities, leaving it with a coverage ratio of 99.7% at year-end.

Over the period, the TNO scheme lowered its interest hedge from 75% to 65%, in anticipation of an increase in interest rates.

At the same time, it reduced its equity norm portfolio by 4% to 24% to neutralise the changed risk profile.

The pension fund also replaced its active equity mandates with passive ones due to the "decreasing performance and the relatively high costs of active management".

For the second quarter of 2012, the scheme reported a 2.3% return, taking its first-half performance to 7.5%, mainly thanks to returns on equity (7.5%) and fixed income (5.3%).

During the first six months, it saw its funding ratio fall to 98.1%, and the fund confirmed that it would have to take "additional measures" - including a rights cut - if funding failed to improve to at least 101.1% by year-end.

The TNO scheme's equity holdings delivered a loss of 7% for the whole of 2011, while its fixed income portfolio returned 3%.

It said it was in the process of replacing the manager on its local-currency emerging market government bond portfolio, which lost 4% last year, 2 percentage points shy of the benchmark.

Private equity was the best performing asset class, returning 10.6% over the period, while property recorded a 16.6% loss, following the divestment of a large part of its investments in the ailing Dutch offices market.

TNO's active tactical asset allocation returned 0.37%.

The fund said it had begun to improve its pensions administration, and that it was weighing the possibility of outsourcing pensions provision.

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