UK – HSBC says funds of hedge funds have an “interesting return profile” for pension funds and that there are “very real” diversification benefits.

HSBC Republic Investments, the bank’s fund of hedge fund business, has released analysis comparing the characteristics of fund of funds products with index-linked UK government bonds, or gilts.

It looked at the portfolio diversification benefits of allocating to a fund of hedge funds in place of some of the index-linked gilt component.

The research follows a study last month by Greenwich Associates which found that pension funds plan to put “huge amounts” into hedge funds

HSBC said: “When measured using a risk adjusted return ratio, for example the Sharpe Ratio, the funds of funds outperform the indices dispelling the idea that improved returns have been achieved with higher risk.”

IT used the FTSE Actuaries Government Securities UK Index Linked Total Return Indices as a comparator.

The bank added: “However, the key factor in this analysis is that a portfolio of hedge funds has an interesting return profile for any UK pension fund, where preservation of capital in real terms is important in the current investment climate.”

“Whilst the contributors to the return profile are very different from an index-linked gilt return profile, the diversification benefits appear very real.”

The HSBC report added that the fund of hedge funds approach is “the most conservative method of investing in the sector”.

“This diminishes the risks associated with poor manager selection and other factors associated with investing in hedge funds.”