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IPE special report May 2018

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Other funds seen following BT hedge lead

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UK – Other pension funds might follow the example of the BT Pension Fund, which has allocated 500 million pounds (750 million euros) to hedge funds over the next two to three years.

“Where BT goes others will follow,” said John Godden, managing director of Hedge Funds Research.

Godden said that, although some pension fund have so far allocated less than one per cent of their assets in hedge funds, the asset class is slowly becoming more mainstream.

Pension funds which have invested in hedge funds are seen to be doing better than those who did not. Those who invested in hedge funds, Godden pointed out, could use their experience to invest on a bigger scale.

“Hedge funds are used to significantly reduce risks,” he said, adding: "They do not get all the upside of equities, but they definitely do not get the downside. "They move in a completely different way.”

Chris Hitchen, incoming chairman of the National Association of Pension Funds’ investment committee, recently wrote that the hedge fund market was “inherently stable”.

And a survey by Greenwich Associates this week suggested that the asset class’ growth could be slowing “due to a recovering stock market, an inability to supply sufficient product to the largest corporate and public pension plans”. It also cited issues such as “transparency, risks, and fees”.

It said endowments and foundations, the largest institutional hedge fund investors, are expected to cut their allocation to a targeted 14.2%.

The minimisation of risks is achieved with hedge fund through a high differentiation, Godden said.

Nick Mustoe, chief investment officer and deputy chief executive of Hermes Pensions Management, the asset manager which is owned by the BT Pension Fund, said hedge funds with ‘stable returns’ would be selected.

Hermes, he also said, had researched the hedge-funds market for 18 months.

The 500 million pounds, two per cent of the fund’s assets, is to be invested between late summer and autumn and next year. The cash will come from its equities portfolio.

BT’s allocation might increase if the initial investment proved profitable and BT would consider other large pension funds as co-investors, Mustoe said.

“We are trying to put together a portfolio of 40 hedge funds. They all have different approaches and what we are trying to do is a sort of mix and match,” he commented.

Large UK schemes, he also said, have so far showed interest in hedge funds but had lagged behind continental European pension funds, discouraged by the high costs connected with the funds of funds investments and uncertainty as to how to do it.


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