The £2.1bn Warwickshire County Council Pension Fund has sold off its hedge fund allocation in anticipation of its move into the Border to Coast Pensions Partnership.
Hedge funds have been a dominant feature of scheme allocations to alternatives in the past, but their popularity appears to be on the wane. According to UBS, hedge fund exposure accounted for 19.1 per cent of the average local authority pension scheme’s alternative assets in the first quarter of 2016. In 2012 this was 25.1 per cent.
The WCCPF has terminated its hedge fund mandate with Blackstone, which made up 5 per cent of its strategic asset allocation. Committee minutes noted that 95 per cent of the withdrawal has been completed so far, with the remaining 5 per cent to be paid out in summer 2018.
The divestment is being used to increase the scheme's allocation to an unconstrained global bond fund managed by JPMorgan Asset Management.
Trustee boards, investment committees and CIOs are generally having another look at hedge fund allocations
Steve Delo, Pan Governance
The scheme has joined eleven other Local Government Pension Scheme members in the Border to Coast Pensions Partnership. This month, schemes across England and Wales began to transfer assets into eight pools under proposals drawn up by former chancellor of the exchequer George Osborne in 2015.
Insufficient demand in pool
Mathew Dawson, treasury and pension fund manager at Warwickshire, attributed the decision to drop hedge funds from the scheme’s portfolio to the demands of LGPS pooling.
"The county council has committed to transition all pension fund assets to the Border to Coast Pensions Partnership," he said.
"There are no other pension funds within the Border to Coast Pensions Partnership that have an allocation to hedge funds, so it would not be prudent for them or Warwickshire to open a sub-fund for just one fund where scale and/or cost savings are not achieved," he added.
While several Border to Coast participants such as the Cumbria Local Government Pension Scheme do not invest in hedge funds, Pensions Expert research revealed that at least one other fund does have exposure to them.
Jo Ray, pension fund manager at the Lincolnshire County Council Pension Fund, which also belongs to the BCPP, disclosed that her scheme’s allocation to alternatives currently includes hedge fund investment.
Hedge funds branded expensive and opaque
Hedge funds have been praised in the past for their diversification offering and their risk-reduction benefits. But investors, including those in the BCPP, are now questioning their value.
The Durham County Council Pension Fund is one such scheme. One of Warwickshire's pooling partners, it is not currently invested in hedge funds, and its pensions manager Nick Orton has criticised the asset class.
He said the absence of hedge funds in his fund’s portfolio was "mainly because of the high fees and lack of transparency associated with hedge funds".
According to Steve Delo, managing director at Pan Governance, Orton is not alone in his scepticism.
"Trustee boards, investment committees and CIOs are generally having another look at hedge fund allocations [and] questioning whether the risk mitigation [and] diversification benefits they allegedly deliver are worth the invariably chunky fees charged," he said.
How pooling is influencing investment strategies
Schemes were set a deadline of April 1 2018 to be ready to move assets into LGPS pools. The Border to Coast pool's constituents had approximately £43bn in assets under management as of March 31 2017.
For all the benefits of scale and collective buying power, the requirements have influenced the direction of LGPS investment strategies. In Warwickshire’s case, it has effectively rendered an asset class unsuitable owing to its unpopularity with partner investors.
Caroline Escott, policy lead for investment and defined benefits at the Pensions and Lifetime Savings Association, recognises uncertainty over the future of more illiquid asset classes in light of pooling. But she proposed that pooling may in fact facilitate investment in these areas.
Parliamentary scheme elects alternative credit
The Parliamentary Contributory Pension Fund has introduced a new allocation to alternative credit to further diversify the scheme’s portfolio of return-seeking assets.
She said the benefits of scale include "access to better investment expertise" and "more nimble governance arrangements".
"That includes expertise in some of the more alternative investment classes, which can include things like hedge fund allocations," she added.
