DENMARK - Unipension, the administration company managing some DKK80bn (€11bn) for Denmark's Architects' Pension Fund (AP), the Pension Fund for Danish MAs, MScs and PhDs (MP) and the Pension Fund for Agricultural Academics and Veterinary Surgeons (PJD), is divesting from its fund of hedge fund investments.

It is citing a lack of transparency and their failure to provide real diversification during the financial crisis. The company has not ruled out returning to hedge funds in the future, however.

Unipension made its initial hedge fund allocation in the expectation that the investments would not be correlated with its traditional allocations to bonds, equity and property. It invested in two funds of funds - one a broad, diversified product and the other more opportunistic and concentrated.

"The crisis of 2008 revealed that they did not bring the diversification effect that we'd hoped for when we most needed it," said chief investment officer Niels Erik Petersen.

Unipension was also disappointed with the kinds of strategy that their underlying managers began to pursue in the months leading up to the credit crisis, particularly in very illiquid instruments.

"We hadn't expected them to invest in very illiquid structures, which, after all, it makes much more sense for us, as a pension fund, to do ourselves," said Petersen. "We expected our hedge funds to be more market-opportunistic." When Unipension engaged its providers on these issues, "the answers we got did not change our decision to get out of these structures", he added.

Having already divested from the diversified fund of funds, Unipension is now finalising divestment from its more concentrated portfolio with London-based Cheyne Capital.

Asked if Unipension might reconsider funds of hedge funds if they could get a tilt towards the strategies that did perform well through the crisis - directional trading strategies like global macro or managed futures, which are also arguably best suited to managed accounts that provide more transparency - Petersen remained circumspect. 

"We don't know yet what our approach will be - at this point we are still liquidating our original positions," he said. "But if we are going to go back to hedge funds, we are going to require much greater visibility so that we can calculate our risk exposures all the way through and be certain that the funds offer real diversification - including during financial crises."

Unipension enjoyed a good 2009, taking advantage of market dislocations: all three pension funds outperformed their benchmarks, with AP returning 14.3%, MP 16.9% and PJD 17.8%.