EUROPE - In current market conditions, pension funds would be better off placing emphasis on strategies that are more dependent on manager skill rather than the direction of the markets, argues Peter Hill, a hedge fund specialist at Hewitt Associates.

According to research conducted by the consultant, investments in the hedge fund area have picked up dramatically in the last two years, with Hewitt advising on the appointment of 54 client mandates in the last 24 months.

"Prior to 2006 the number of our clients that had implemented any kind of hedge fund exposure was just a hand full," Hill told IPE.

The increase is partly down to investor confidence, as many hedge funds have become more mainstream in terms of maturity of business, the size of assets and the way that they operate.

Moreover, trustees are now more aware and likely to be better educated to consider these types of investments, said Hill.

However, he added that pension funds have also been more eager to look at hedge funds in particular because of the recent market turmoil.
"The outlook for bond and equity markets is not that great, and we think that clients ought to be placing more emphasis on strategies that are more dependent on underlying manager skill rather than the direction of markets, and in that area of course that is what you pay for with hedge funds," commented Hill.

Because these products attempt to preserve capital when traditional markets are heading south, hedge funds have received a good reception.

Hewitt says in the context of global stock market indices being down significantly - with the MSCI World Index down 9.5%, over the 12-month period ended June 30 - the average return of Hewitt's hedge fund of fund buy list was 1.9%.

The list is a selection of fund of funds that typically target LIBOR +3% to 5% in various different ways, with some being multi-strategy, or market neutral, and long/short, but targeting the same level of return.

"If you took the average return, an equal weighted average of those funds from  the last 12 months, the return would have been 1.9%. So these funds have typically done a good job in preserving capital when markets have been down," concludes Hill.

That said, the Dutch pension fund regulator DNB yesterday warned in its Quarter Report September 2008 that hedge funds and private equity houses are under pressure by the market turmoil.

"In the past half year the hedge fund sector booked a return of only 0.75%, the lowes level since two decades," according to the DNB.

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