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The Bayerische Versorgungkammer (BVK), Germany’s largest pension fund with €38bn in assets, plans to raise allocations to hedge funds to €1bn by the end of 2006 – from €150m currently.
Speaking at the recent SuperHedge conference in Frankfurt, BVK chief investment officer Daniel Just said the BVK would raise hedge fund allocations to €1bn by the end of 2006 and to 5% of total assets in the long term.
In late 2004, BVK decided to begin investing in hedge funds and Just noted that in its first year of exposure to hedge funds, the BVK achieved a return of 7% – above its own target of 5% and above the average for the asset class in 2005.
Just pointed out that the BVK, as a Versorgungswerk, was not subject to German financial services regulator BaFin but instead was supervised by Bavarian financial authorities.
So BaFin rules on hedge fund investing do not apply to German Versorgungswerke, which are pension funds that serve specific professions.
Just said that after the BVK submitted detailed plans for investing in hedge funds to the Bavarian supervisors, they were approved within a fortnight.
German boutique asset manager Lupus alpha’s “talent hotel” for new managers could soon be full, says Ulf Becker, partner in the firm’s alternative solutions department.
He described to the conference the firm’s initiative as being to fund five new managers with seed money and give them two years to run their investment strategies without interference.
Becker said: “We hope to provide up to €75m in seed capital to these managers to be run according to their strategies.”
The aim is to ‘close the gap’ between the opportunities for managers in Germany compared with the US and UK. While the managers could be located anywhere, Lupus alpha will provide the back office, risk management and other operational services, he explained. This would enable the managers to concentrate on running their portfolios.
“They don’t want to manage a business.” The vehicle to be used is a fund of fund vehicle which could be used for both hedge funds and long-only strategies,” he said. Lupus alpha is approaching clients and other sources to raise the capital for investment. These investors would form an investment committee to oversee the project.
“The idea is to give the new managers all the freedoms they need to manage money successfully,” said Becker. He pointed out that there were still a stigma to failure for managers setting up on their own in Germany and not succeeding. This did not apply in the US.
Becker is 99% confident that the firm would raise sufficient capital for the initiative to be put in place. “We hope to have the first stage in place by the end of September.”
If this is successful, he said, he would like to see it build up to include eight to 10 strategies over time. Institutional investors are now the “driving force” of the hedge fund industry, Jay Raffaldini of UBS told the conference. Investors complain about returns falling and alpha disappearing from the hedge business. “Returns may be falling but so is the level of risk being taken,” he said.
“If you look at the last few years compared with 10 years ago, we are having the same level of return per unit of risk undertaken,” said Raffaldini, who is managing director of UBS Alternative and Quantitative Investments, based in Stamford in the US.
The question he asked is - why is the level of risk falling? “This is due to the institutional investors becoming the driving force of the business.” Institutional investors are conservative and risk averse and because if this, the hedge fund industry is changing, he maintained.
“Back in the 1990s, institutions accounted for only 5% of the hedge fund universe, now they are 60%. That is a huge increase.” Hedge funds’ response is to become conservative, he added.
Ten years ago, nine of the top 10 managers were macro, now only one of the current top 10 is in this category, according to Raffaldini. The advent of the euro had an influence here, but more important in his view was the “dominance of the institutions”.
“It is no longer a case of investors saying ‘I want to give my money to a Tiger or Soros’,” he said. The game now is one of the institutions allocating their risk budgets across the different strategies.
The element of portfolio construction was much stronger than a decade ago, he said. It was no longer a question of chasing individual managers. He pointed out that UBS manages $44bn in hedge fund assets, where it reckons it is the biggest hedge of hedge funds providers, with $36bn of assets in these vehicles. Further barriers to hedge fund investing could be removed later this year in the coming reform to the German Investment Act, according to a law firm.
Henning Starke, a partner with law firm SJ Berwin told the SuperHedge event that liquidity was one of the biggest issues facing pension funds and those setting up funds of hedge funds.
One restriction of the act currently limited the period between the notice date of investor withdrawal and the date of actual redemption to 100 days. “There is a problem in deciding when the redemption date is,” said Stark.
The redemption is carried out at the asset value of that date, he pointed out. But in funds of funds it depends on the value of the assets in the target funds. “This can take five to 20 days after the actual valuation date.”
“Then it will take even more time to cough up the money.” The whole period might take 160 days he noted when the processing is completed. “The law only allows 100 days for all of this.”
He believed it was important to look at the intention of the lawmaker and not just the wording of the law as regulator BAFin does currently – quite correctly, he pointed out.
The 100 days should refer to the period from the notice to the valuation. “This was the only interpretation that made sense.”
BAFin has accepted this and Stark believed the proposal to reform this would be in the upcoming amendments to the investment act.
“BAFin currently grants an extra five days plus to allow for processing,” he pointed out. “Currently with funds set up solely for institutional investors there might be some additional room.”
He reckoned that in setting up funds of hedge funds in general some 40% of the time was taken up with the liquidity issues. He said the expectation was that the amended law would go through in the second half of this year.

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