UK - Pension funds will place more emphasis on risk hedging in 2008, and will continue to target absolute return strategies over passive management, fund managers have predicted.
A poll of 100 institutional fund managers conducted by Hewitt Associates revealed 65% of managers believe risk hedging will become more of an issue for pension funds as they try to achieve the right risk-return balance.
Fiindings also showed 95% of the managers surveyed believe pension funds will look for strategies targetting absolute returns, rather than those which are measured relative to wider market performance or a benchmark.
Hewitt pointed out in 2007 35% of all its manager selection focused on absolute return strategies, and it believes trustees will continue to look for skilled active managers to add value to the fund.
This is supported by research findings suggesting just 5% of fund managers believe passive management is set for resurgence over the next year.
Andy Tunningley, head of the UK investment practice at Hewitt, said: "In the context of volatile public markets, schemes really see the value that manager skill can add over and above passive management."
The survey, which focused on the current investment climate and its impact on UK pension funds, also revealed 65% of managers believe schemes will start to engage in more risk hedging.
Hewitt said it is not surprised schemes will seek to hedge risk more fully, as it is already proactively speaking to clients across its retirement consulting business to ensure they understand and can evaluate both the investment and funding risks.
Tunningley said: "Only by identifying and quantifying the risks in a pension scheme, can sponsors and trustees take the right action. This might mean reducing or removing risks, but in many cases will involve retaining or even raising the level of risk being run."
"Getting the right risk-reward balance will be a key feature of 2008," he added.
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