We are evaluating - constantly - our exposure to alternatives. How innocuous that word ‘alternative’ sounds; it does not do justice to the magnitude of actual and potential losses. It is not because opportunities are not there, but it is the continuing outflows that threaten us and our managers.

James, our fund of hedge fund manager, was a shadow of his former self. We had decided to cut our losses and redeem our holdings. ‘But you can’t do that.’ he replied rapidly. ‘Why not?’ ‘Because there is an investment case which states that this is precisely the wrong time to redeem, that our underlying managers are seeing enormous opportunity in this volatility and you would be exiting at precisely the wrong moment’. ‘The wrong moment for me, or the wrong moment for you?’ ‘For you, Pieter. We have seen most of our clients in the last three months and yes, there is a lot of concern. But there has also been widespread acceptance of keeping exposure to a diversified portfolio.’

‘Does acknowledgement of validity equate to clients not withdrawing their money?’ ‘Well some have had to because of their need for cash, but on the whole other clients have decided to remain invested.’

‘OK James, let’s look at some statistics. Both your fund of hedge funds and my allocation suffered a performance fall of 34% last calendar year, and assets are now $800m or just under. Correct?’ ‘Yes, that does seem to be about right.’

‘So how many of your clients are redeeming?’ ‘I cannot give you accurate statistics and also client confidentiality would kick in here so I would be unable to tell you.’

‘OK James, then let’s get to the point: how are you meeting the redemptions? You are not getting any inflows into the funds are you?’ ‘We are meeting redemptions by taking money away from our managers’. ‘Which managers?’ ‘All the managers on a balanced basis so that our asset allocation policy remains intact’. ‘And what happens when managers are stopping withdrawals? Do you take money away from the more successful managers because you are forced to do so?’ ‘We have seen a bit of that.’

‘So asset allocation policy becomes redundant and everyone simply becomes desperate to keep money, irrespective of market conditions.’ James is silent for a moment. ‘We are under pressure, and we are hoping that we and our managers can stem the outflows, but it is a very difficult environment.’ ‘Don’t give me that British understatement, James. I am allocated to long/short managers who can’t short, managers who are storing cash to meet redemptions rather than investing, and a fund of funds manager that is working overtime to keep assets but not thinking creatively about asset allocation so that we as investors can see some reason to stay with you.’ ‘Well we are thinking of other ways to meet redemptions.’ ‘Such as?’ ‘We are talking to our bankers regarding a loan.’

Pieter Mullen is investment director at Wasserdicht Pension Funds