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Despite the rush elsewhere in Europe to find new sources of extra return, only a few Belgian pension funds include alternative investments within their portfolios. “I am under the impression that a lot of Belgian pension funds are focusing on governance, valuation methods for the liability side and asset allocation decisions,” says Johan Cras, Russell’s managing director for the Benelux countries. “Once they have dealt with these issues, as a next step they will think more concretely about setting up an alternative investment strategy.”
One high-profile user of alternatives is the €1.3bn Suez-Tractebel pension fund, which holds practically all of its portfolio within a Luxembourg Sicav. The Sicav contains three sub-funds corresponding to the three risk profiles adopted within the portfolio. Both the high-risk and medium-risk profiles includes alternatives – private equity in the former (along with listed equities and high-yield debt), and hedge funds (along with real estate and convertible bonds).
But Suez-Tractebel and the handful of other funds who use alternatives are the exceptions which prove the rule.
“At the moment, people are talking a lot about alternative investments, but I don’t see it being put into practice very much,” says Willy Santermans, senior actuary, Mercers in Brussels. “Of the 100 funds of all sizes we have surveyed, only 5% have alternative investments.”
He says the main reason is the relatively small number and size of Belgian pension funds. “Most pension funds have only one asset manager, such as the local bank manager,” he says. “They know alternative investments exist but it remains an exotic asset class.”
He says there is something of a trend towards alternatives among the larger pension funds. “In future, the drive for returns may strengthen interest, but only among the larger funds,” he says. “I think there will be a trend towards alternatives as pension funds look for diversification and better returns, but I don’t see it as being very significant.”
“In general, Belgian pension funds are fairly small,” says Johan Heymans, general manager, Watson Wyatt’s Brussels office. “Alternative investments might make up five-10% of a very small fund. But you need a certain critical mass to invest in those assets, and small pension funds cannot achieve that.”
“Some bigger pension funds use private equity, but I haven’t come across any using hedge funds, although they are considering it.” Heymans says that from talking to clients, it is clear that diversification in equity allocation still needs to be improved, but they intend to do so without going into private equity, preferring instead to go into emerging market equities or riskier credits if they want to diversify by allocating a part of their portfolios to riskier assets.
“The knowledge budget required for alternative assets is too high for the level of expertise available in many pension funds,” he says.
“Most Belgian pension funds do not have investment committees, so quite often it is the finance director who makes the investment decisions. That is not the main part of their job, so they do not have the time to think about different asset classes.”
He says that some pension funds do invest in currency, but with limited objectives.
“In most cases, currency is linked to currency hedging,” he says. “Funds are not looking for alpha out of this particular asset.”
“It makes sense to have a diversified portfolio,” says Luc Vanbriel, head of institutional business development, KBC Asset Management. “But most Belgian pension funds do not invest in hedge funds, or at least, only to a very limited extent.”
He says there are two main reasons for this. “First, most Belgian pension funds are small to medium-sized, and investing in hedge funds requires a great commitment to select and to follow up. You have to spend a lot of time and money to select managers, as it is a more difficult sector than the equity and bond markets.”
Vanbriel says the other reason for the lack of interest arises from Belgian legislation, which imposes certain investment restrictions.
“Depending on the funding ratios of the pension funds, there may not be much room to invest in hedge funds,” he says. “In 2000 to 2003, when hedge funds were popular, most Belgian pension funds had a funding ratio of 100:110 assets:liabilities, which meant they couldn’t really invest, unless it was through a UCITS structure. There has since been an improvement in funding ratios, but interest in hedge funds has waned somewhat.”
KBC themselves have been marketing hedge fund products since 2000, and recently launched some others as UCITS, which should make it easier for pension funds to invest.
However, Vanbriel says it will take some time before Belgian pension funds take a strategic decision to invest in hedge funds.
KBC also offer structured products with a guaranteed link to equity markets or to the yield curve.
“Structured products are very popular for the retail market, but most pension funds do not use them,” says Vandriel. “That is partly because of the level of knowledge required, and also because until recently, structured products were not available as UCITS. However, that has since been changed.”
Ironically, Vanbriel says that it can be easier to encourage the smaller, rather than larger, funds to use alternatives.
“The bigger pension funds have several managers, so the influence we have over any decision to invest in hedge funds is not so great, as we only run one segment of the portfolio,” he says. “With the smaller funds, however, we are the sole managers, and run a balanced mandate. So we are responsible for tactical asset allocation, and hedge funds are more easily accepted.”
Vanbriel says that there are increasing signs that the smaller pension funds want to use hedge funds more.
“If their Board allows it, then we often do so,” he says. “But it is a strategic decision, not based on short-term fundamentals.”
Where they do invest, KBC’s pension fund clients use both funds of hedge funds and single funds.
“The first step is often a fund of hedge funds with defensive strategies,” says Vanbriel. “Then after a while, when they are comfortable with it, we introduce single strategy funds. Absolute return funds are still popular. But I think clients are looking for funds with limited volatility and with more return than they get from government bonds.”
He says that investment in private equity by Belgian pension funds is also stunted, for the same reasons that hedge fund investment is limited. But he does see things changing in the future, albeit slowly.
“I think there is definite interest in hedge funds and other absolute return strategies,” he says. “The potential is there, but we will never get the average Belgian pension fund to invest up to 20% in alternatives.”

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