Consultants and hedge fund managers have predicted increasing pension scheme allocations to the asset class, despite recent stiff criticism of perceived high fees and a lack of transparency.
The exit of the California Public Employees' Retirement System and the London Pensions Fund Authority has grabbed headlines, while at the Davos Economic Forum billionaire investor George Soros repeated the intervention of Warren Buffett in warning pension funds off the asset class.
The LPFA’s departure from hedge fund Brevan Howard also followed a recommendation from the Department for Communities and Local Government for public sector assets to be moved out of actively managed vehicles, including hedge funds, into low-cost passive structures.
Many trustees are asking questions about their existing or prospective hedge fund allocations
Jack Inglis, AIMA
Susan Martin, chief executive officer at the LPFA, said the scheme had concerns over transparency and whether the '2 and 20' fee model was in the interest of asset owners.
But despite this criticism, consultants and managers anticipate hedge fund allocations will increase over the coming years as pension schemes diversify their portfolios and chase yield.
Robert Howie, principal in the alternatives research boutique at consultancy Mercer, said: “We’ve seen a long-term trend of pension funds putting more money into hedge funds over 10 years or more, and we fully anticipate that trend will continue.”
“There have been headline-grabbing reductions but there are a lot of medium and small plans not making headlines that make up for that,” he added.
A survey of hedge fund professionals published this week by financial services group State Street revealed 55 per cent of 235 hedge fund executives expect pension funds to increase their exposure to the sector in the next five years.
A third (35 per cent) of respondents thought pension scheme investors would allocate to hedge funds in order to diversify portfolios, while 53 per cent thought performance challenges would lead pension schemes to pursue alpha through such unconstrained strategies.
Speaking about the research, Jennifer Tribush, senior vice president and North American head of alternatives at State Street, said she thought the industry was “no longer looking in the rear-view mirror.”
“The hedge fund industry is maturing… they’ve realised investors are becoming more sophisticated and want to offer more of a solutions-based fund, acknowledging how they are contributing to the overall portfolio,” said Tribush.
Howie said he thought the industry had done a "reasonably good job of making itself more institutional friendly", adding: "The fees are still very high but have started to drift down, transparency is much improved and there’s better regulation of the whole industry."
Managers target trustees
The Alternative Investment Management Association, together with the Chartered Alternative Investment Analyst Association, yesterday published the first of a series of educational papers about hedge funds for pension fund trustees.
'The Way Ahead: Helping trustees navigate the hedge fund sector', aims to provide trustees with practical guidance about the challenges and advantages of hedge fund investments.
Jack Inglis, CEO of the AIMA, said: “Many trustees are asking questions about their existing or prospective hedge fund allocations. Rarely has there been such demand for a realistic assessment of the benefits – and also the risks – associated with hedge fund investing.”
In State Street's survey, more than eight out of 10 hedge fund managers (83 per cent) expected regulatory scrutiny to increase over the next five years.
The requirements of the European Union's Alternative Investment Fund Manager Directive and the Foreign Account Tax Compliance Act, among others, is forcing the industry to respond by improving data reporting.
Jean-Marc Stenger, chief investment officer for alternative investments at Lyxor Asset Management, said he thought increasing regulatory pressure provided an opportunity for hedge funds to provide a more mainstream offering.
“Many consider some hedge fund strategies that are packaged under new regulations as just a component of their traditional asset mix, migrating from a specific part of a portfolio into the main part,” he said. “Long-short equity... for clients today, is just part of their equity portfolio, invested through a hedge fund."
