Schemes eye hedge funds in hunt for return certainty

A recent study by asset manager BlackRock found that of the world’s 87 largest institutional investors, 28 per cent said they intended to increase allocations in 2014 while 13 per cent said they plan to shrink holdings.

Robert McElvanney, senior investment consultant at Aon Hewitt, said schemes have seen improvements in funding levels due to strong equity markets in 2013 and increased gilt yields.

“Some pension plans are looking at how they can take advantage of that and take some risk out their investment strategies,” said McElvanney.

“Part of what they are considering is, can we reduce the equity component and replace that with other growth assets which can have good expected returns but with less uncertainty around those returns, and hedge funds may the answer to that.”

Strategies that seek to take advantage of macroeconomic events, and merger and acquisition activity, have gained attention, experts have said. 

Ted Logan, director at BlackRock Alternative Advisors, said he expects to see more interest from UK schemes in credit hedge funds, as schemes are diversifying their fixed income portfolios.

“They have already tapped out high yield,” Logan said. “They are going further out on the credit spectrum and looking at intermediate credit investments.”

Olivier Lebleu, head of non-US distribution at Old Mutual Asset Management, said the success of diversified growth funds in the UK pension market has helped with the acceptance of hedge funds.

Lebleu said he has seen increasing interest in activist hedge funds. “I’m attributing that to the Kay review and calls for greater shareholder activism, as part of a greater call for responsible capitalism and the notion that you need to hold management teams to account through some sort of engagement,” he said.

The challenge associated with the fee structure of fund of hedge funds has led schemes to consider different ways of accessing hedge funds.

Logan said schemes are looking for more bespoke solutions because they do not want off-the-shelf products.

“Some schemes have gone for a combination of single strategies,” McElvanney said. “In our case, we select a group of single strategies to meet the pension plan’s requirement of risk-return [balance] and we try to do it in such a way to reduce market risks.”