Hedging your bets
Just over 70% of respondents to this month's Off The Record quick poll stated that their pension fund invested in hedge funds.
A Swiss respondent was the first to have made an investment in hedge funds, in 1997, while most respondents stated they made their first investment between 2005 and 2008. The average proportion of respondents' total assets invested in hedge funds was 18.2%, taking into account a Portuguese fund that claims to invest all of its assets in this area.
Some 83.5% of those respondents investing in hedge funds make at least some of their allocation directly. Funds of funds are still used by 58.5% and one-quarter use managed accounts. Only one uses replication or index products.
Just under 65% of respondents said their strategic allocation to hedge funds would not change over the next three years. An Austrian fund commented: "[We] review positions on an ongoing basis and compare [our fund] to peers. No big changes are planned for 2012". Some 18% were planning to reduce their strategic allocation. "[Our] return expectations [were] not met," stated another Austrian fund.
A further 9% planned to increase their strategic allocation to hedge funds, with the remaining 9% planning to change the way they invest. A Swiss fund commented: "[We plan to] increase global allocation whilst changing the structure - more direct investments and reducing fund of hedge funds."
Respondents were fairly evenly split as to whether hedge funds represent value for money. "Yes, if you manage to choose the right ones. No, if you just take the average hedge fund," said a Swedish scheme. An Austrian fund added: "In the past, hedge funds generally added low correlated returns to a multi-asset portfolio, but what has been learned [from] the crisis in 2008 is that in a stressed environment, when correlation patterns disappear, hedge funds are not immune."
However, respondents were almost unanimous in the belief that institutional investors do not negotiate hard enough with hedge fund providers on fees and other terms. One fund clarified it as such: "Fee levels are too high but, due to the persistent demand for hedge funds, there is no easing in sight. On the fund of fund side, we see that competition is getting harder and therefore fees and terms can be negotiated much better than three years [ago]."
Every respondent investing in hedge funds felt the past four years had worsened the image of hedge funds, while recognising that the criticism is not always fully deserved. "Hedge funds quite often (undeservedly so for the most part) get the blame for a lot of things that have gone badly in the financial world over the last few years," commented an Icelandic scheme. A Swiss fund added: "Side pockets, gates, Madoff, and [2008 US Ponzi scheme scandal] Petters are events that gave the industry a bad image, but there are still ‘good' hedge funds."
Indeed, of those respondents that did not invest in hedge funds, the majority, 60%, said one of the reasons was too much reputation or ‘headline' risk. Some 40% believed the fees to be too high, 20% that net returns are too low, and 20% were not convinced by the diversification argument. A UK fund felt that investing in hedge funds was "bad for [the] economy".
None of these respondents had any plans to invest in hedge funds. "[It is] too expensive, [and there is a] lack of transparency and governance," stated a Dutch fund, while another was "not convinced that the net returns would be attractive". A UK fund referred to it as "speculation not investment".