Hedge funds and private equity win in diversity push
UK - Pensions funds chose to further diversify their asset allocation strategies last year by investing more of their assets in direct hedge funds and direct private equity while reducing the search for real estate managers, suggests a review of Watson Wyatt's manager selections.
A closer analysis of the mandates awarded and managers searches conducted by the consultancy's clients last year suggested UK pension funds are seeking to diversify their assets in a bid to meet the scheme's risk profile but are shifting away from earlier focus on fund-of-funds offerings to buy into more direct products, though they do so at a higher cost.
A spokesman for Watson Wyatt said not only is there evidence of more searches in the alternatives space but UK pensions funds are likely to be "indicative" of European pension funds' strategies.
Approximately 30% more searches for direct hedge funds were done in 2008 than in the previous year while the number of fund-of-hedge-fund mandates fell as a proportion of hedge fund calls, from 44% to 35%.
Single-manager hedge funds now account for approximately two-thirds of searches with multi-strategy and long-short equity funds being the most popular choice.
In contrast, however, the searches conducted for real estate managers were just a quarter of those raised in 2007, according to Craig Baker, global head of manager research, as tough property market conditions are likely to have deterred investors at this time, and of those which did complete the emphasis was very much on shifting the geographical focus from UK to overseas real estate allocations.
"While real estate has evolved considerably in a relatively short period of time, 2008 did not represent good timing for allocations to this area," said Baker.
Interestingly, there were 10 new mandates for infrastructure investments by UK pension funds while there was also a 25% jump in the number of new bond mandates in 2008, albeit these were largely to UK strategies for liability hedging reasons.
And among the private equity mandates, there was also a higher focus on funds looking at mid-market buyouts and distressed strategies - completed in the main by larger pension funds - than on private equity fund-of-funds.
That said, while pension fund diversity is becoming increasingly commonplace, argued Paul Trickett, European head of investment consulting at Watson Wyatt, the higher use of alternatives and the complexities attached means trustees are either raising the quality of their governance strategies or simplifying them and moving to lower cost, passive solutions.
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