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Consultant warns of hedge fund ‘contagion’

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UK – A leading pension consultant has warned that hedge funds could represent a contagion to the global financial markets.

“The risk of contagion to the health of the financial system cannot be underestimated,” said George Henshilwood, principal at Hymans Robertson, referring to the amount of derivatives being used by hedge funds.

“I’m not a great fan of hedge funds, particularly in the context of pension funds,” he said in a debate at the National Association of Pension Funds’ investment conference in Edinburgh. He said he was sounding a ‘cautionary note’ to trustees.

He said data on hedge funds was “scanty” and that they benefit fund managers – while trustees were usually only buying past performance. He wondered if they fitted with the prudent person principle of investing. He pointed out that the Myners Review “didn’t tell us to buy into every new idea drummed up by the fund management industry”.

“Do we really know what we’re investing in?” he asked delegates.

“We’ve forgotten about investing and our focus has shifted to just making money,” he said, adding that he worried about the potential backlash on trustees “if and when it goes wrong”.

He was worried about the lack of transparency, compliance and lack of good managers in hedge funds.

Henshilwood’s arguments were countered by Ian Morley of Dawnay Day Olympia. He said hedge funds preserve wealth while not being risky. “Give managers the freedom to have more tools,” he said.

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