Focus Group: Don't run with elephants
Half of the investors polled for this month’s Focus Group allocate to hedge funds. One additional fund manages hedge fund strategies in-house.
In September, CalPERS, one of the world’s largest pension funds, decided to divest from hedge funds. Respondents were split as to whether this has any relevance to them.
Twelve respondents feel that it is relevant. “As CalPERS had been actively promoting investing in hedge funds, its recent decision will encourage other pension funds to reconsider their interest,” said a French fund. “I think that hedge funds are too broad a concept, that encompasses things that do not have much in common.”
Nine respondents disagree. “[It’s] never smart to run with the elephants,” as one Dutch fund put it. “Who cares? CalPERS is a big, political organisation under pressure from populist idiots.”
Some have argued that the main issue for CalPERS was performance, but also that its 2% allocation was not large enough. CalPERS’ CIO Ted Eliopoulos cited this “lack of ability to scale” its hedge fund allocation, but also complexity and costs, as the reasons for divestment.
Ten respondents suspected all these issues were problematic. Among those that picked out one issue, six thought that costs were the decisive factor, four went for the lack of ability to scale and just two cited complexity. A Finnish investor argued that “the illusion of complexity comes partly from information overload”, and that CalPERS’ long-only portfolio would be just as complex as its hedge funds programme.It added that while fees were high, hedge funds “seem to have added a lot of value for many investors”.
Among this month’s respondents, the average allocation to hedge fund strategies is 4% of total assets, with one multinational corporate pension fund having the largest allocation – 8% of its total assets of €2.5bn. Excluding those with no hedge funds at all, an Italian fund with €16bn in AUM has the lowest allocation – just 0.5%.
Five felt their hedge fund allocation was too small for its objectives, and one that it was too big. Six considered their allocation to be the right size. It was no surprise, then, that half of respondents intended to maintain their allocation over the next three years. Three funds said they will increase and three will decrease their allocation, none were intending to end their allocation.
Diversification away from market risk is a main objective of the allocation for eight funds, while six highlight lower-volatility returns, access to specific investing skills and access to specific market opportunities. A Finnish fund’s recommendation is to “diversify and be opportunistic”.
Asked about satisfaction with their hedge fund programmes, there was agreement that hedge funds met the objectives set for them, but investors were less happy about pure returns and transparency, and dissatisfied about costs.
Six respondents thought there was a case for institutions developing hedge fund strategy capabilities in-house. However, a UK fund conceded that “significant resources [would be] required”. Almost twice as many (11 funds) disagree, with a Dutch fund stating: “All structures are completely wrong for a hedge fund environment – infrastructure, management, support, attitude, compensation.”
Of those respondents that do not currently allocate to hedge funds, eight said they had no plans. For two, regulation prohibited involvement. A UK fund “used funds-of-hedge funds previously, but stopped because they did not achieve the diversification objectives and the fees were excessive”.
It is notable that all but two of the full sample agreed, at least to some extent, with the widespread suggestion that the only hedge funds worth allocating to are either expensive and closed to new capital, or so new that they are under the radar.