The shifting priorities of UK defined benefit (DB) pension funds are fuelling renewed appetite for hedge fund investments, according to consultancy Aon, as schemes respond to market volatility and move closer to endgame strategies.
Aon said the current macro-economic environment, combined with improved funding levels across many DB schemes over the past 18 months, has prompted trustees to focus more on shorter-term investment horizons. This change is particularly relevant for schemes approaching risk settlement or considering running on.
“Unlike the defined contribution scheme sector, where there is an increased emphasis on illiquid investments, the shorter-term investment horizons of DB schemes – prompted by thoughts of moving to a risk settlement solution or plans to run-on – have made illiquids less of an option and reopened greater interest in more agile hedge fund investment,” said Guy Saintfiet, partner and head of EMEA fund management at Aon.
He added that Aon’s own hedge fund solution had recorded a significant uptick in interest, with assets under management rising by more than a third over the past year.
The strategy, designed to offer steady absolute returns, downside protection and diversification against equities and credit, has delivered a consistent performance across market cycles, Saintfiet said.
“It’s offering what schemes need as they assess both their own funding and their future,” he noted.
Saintfiet also emphasised that pension schemes were seeking hedge fund strategies that go beyond performance.
“There is also a heightened emphasis on liquidity, cost and ESG integration that is in line with the governance needs of institutional allocators,” he said. “Funds that offer that combination are increasingly attractive.”
Aon added that the demand for hedge fund strategies is not limited to DB schemes. Other institutional investors, such as endowments and foundations, are also turning to the sector as a tactical tool amid ongoing market instability.
“Different economic times demand different investment approaches, and hedge funds are currently offering an opportunity that pension schemes need,” said Tim Banks, partner in Aon’s UK investment practice.
“But that need is not restricted to just pensions – we have also seen increased uptake from other investment clients such as endowments and foundations,” he said.
“Unlike many DB schemes, they do have a longer investment horizon but given the wider market volatility, they are choosing to use hedge funds tactically and as a place to park cash for commitments made to illiquid investments.”
Aon expects this momentum to continue as more institutional investors seek flexible strategies that align with their evolving investment objectives.
Across the pond, however, there has been news that the University of California – with a roster of endowment and pension funds with combined total assets worth $190bn – has decided to divest its 10% absolute return portfolio, which includes hedge funds, investing instead in public equities and bonds, according to the Financial Times.
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