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Pension funds expect hedge fund losses

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EUROPE - Almost three quarters of surveyed pension funds expect to see a negative net-of-fee performance of more than 5% on their hedge fund investments for 2008, suggests IPE research.

Within the remaining quarter of 73 respondents to the survey, pension fund officials said the expected returns for 2008 was evenly split between -4.9% to 0% and 0.1% to 5%.

Despite the turbulence encountered, only nine out of 30 respondents reduced their strategic asset allocation to hedge funds last year, while 13 left it unchanged and 8 pension funds even increased theirs, the research revealed.

"The strategic weight increased as the hedge funds performed in absolute terms better - ie less negative - than other asset classes so our trustees decided not to take [any] money back from the hedge fund manager but [instead to] increase our weight," said one UK scheme.

In similar fashion, 15 out of 29 respondents said they do not plan to change their strategic allocation in 2009, in contrast to eight which plan to reduce their allocation, and six pension funds which aim to increase theirs in the hope of diversification and strong returns.

One Danish pension fund even said: "With the 2008 meltdown behind us, timing is [now] likely to be right to start investing."

Yet of the 44 respondents that currently do not invest in hedge funds, only 27% plan to invest in the asset class in 2009.

When it came to the annualised net-of-fees performance since the first investment, the picture looked somewhat different to that of 2008: 12 of 29 respondents put the performance at between 0.1-5%, while 10 pegged it at 5.1-10%.

Interestingly, only seven respondents suffered a negative performance and these were all pension funds which had made their first hedge fund allocation between 2006 and 2008.

Despite the negative headlines hedge funds made in 2008, the vast majority, - over 76% of 30 respondents - claimed to still have confidence in hedge funds.

As one UK pension fund summed up: "Although our confidence is somewhat damaged due to the Madoff scandal, it was good to hear that our fund manager had the due diligence not to invest with Madoff."

In the IPE survey of 73 pension funds, 40.5% were invested in hedge funds, while 59.5% said they were not.

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