The Dutch pension sector gave a sceptical reception to the recent critical report on hedge funds from the Netherlands Authority for the Financial Markets (AFM).
In the report, based on AFM research, the authority identified several risks, such as a lack of transparency among hedge funds which is a key area of regulatory concern. In addition, the AFM called into question whether fund managers always have sufficient understanding of the investment policies and the risk profile of the hedge funds in which they invest. It said that this was a factor that could put investors' interests at risk.
Several mainstream pension funds noted that while some of the problems presented by the AFM were valid they needed to see whether it would follow up its report with some action. The main view appeared to be that while the AFM often barks, it never bites.
Mn Services, which is one of the main players in the Dutch pension sector actively involved in hedge funds with some €850m invested in the asset class, was more moderate in its response. Oostenbrug and Pater view the report was the first step towards fully fledged research into the hedge funds market and should also be seen as a first step towards a new regulatory framework, according to Niels Oostenbrug, senior fund manager hedge funds at Mn Services. “In this process all interested parties should have a say,” he adds.
Oostenbrug says that the AFM report largely focused on the underlying issues currently shaping investment strategies in hedge funds. ”The main issue that pension funds should consider before investing in a hedge fund is to make sure that they have sufficient knowledge of what hedge funds do,” Oostenbrug says. “Most of the points brought up in the AFM report have already been addressed by Mn Services and are an integral part of our due-diligence process.”
However, he understands the AFM’s reservations. “To be able to assess the uncertainties around hedge funds, pension funds need to free up extra manpower. Overall, further professionalism is needed.”
Roelf Pater, head of asset management at Mn Services, agrees. “It is advisable for pension funds to gain expertise in hedge funds before investing in them,” he says. “Without this expertise, assessing a hedge fund's strategy may lead to disappointment. For instance, we only invests in hedge funds after in-depth due diligence by a multi-disciplinary team. The hedge fund needs to generate the required returns, and all parties need to understand that this is closely related to risks. To cover some of the risks, such as a key manager leaving a hedge fund, we introduce 'key man’ clauses into our agreements.”
And both Oostenbrug and Pater agree that real transparency is needed, not only from the hedge fund but also by the asset manager to its clients. To address these growing issues, Mn Services offers study sessions to its clients, if necessary
However, ABP, another of the Dutch pension industry’s key hedge fund investors, is more reserved in its response too the AFM report. ABP does not give opinions on a subject that is largely concentrated outside the Netherlands, according to a spokesman. An assessment of the AFM report is underway, he added.
But PGGM is less reticent. “The AFM report is largely focused on the retail market,” says PGGM spokesman Martin van den Akker. “At present, we only work with funds of hedge funds, which are stringently assessed and controlled.”
Asked about the possibility of PGGM increasing the risk by taking part in hedge funds, van den Akker says: “PGGM is used to taking risk, it is part of our normal business. Every asset class has its own risks. Price fluctuations as a result of hedge fund investments are still not unclear. Hedge funds will remain part of our portfolio of strategies in the coming years.”