Oxfordshire County Council Pension Scheme is axing its allocation to hedge funds in favour of diversified growth funds and infrastructure, as it seeks lower fees and greater transparency in investments.
Hedge funds are widely seen as a good way of diversifying equity risk, but high fees and perceived lacklustre performance are causing some schemes to look elsewhere. Last month, it was reported the London Pensions Fund Authority pulled its investment from Brevan Howard, the third largest hedge fund in the world.
Oxfordshire carried out a fundamental review of its strategic asset allocation following its 2013 actuarial valuation, in which it decided to move away from hedge funds.
“The committee had been looking to invest in infrastructure for a while,” said the beneficiaries representative in a report to scheme members. “Investing in a DGF will have a similar diversifying effect as hedge funds but at a much lower cost. There will also be greater transparency as to where the money is invested.”
The scheme had 2.2 per cent of its roughly £1.5bn of assets invested in hedge funds, or around £33m at March 31 2013. The net assets of the scheme have since grown to £1.6bn, which was largely put down to investment income and contributions.
Since the financial crisis investors have been more cautious about investments with poor transparency, investment consultants have reported.
“The credit crunch has thrown out a number of things around transparency,” said Adam Brown, principal investment consultant at KPMG. “A lot of people didn’t understand what they had invested in. With diversified growth funds they are typically invested in traditional assets."
However, Brown said that hedge funds have taken steps to address transparency concerns. These steps include managed accounts, where the investor effectively owns the underlying position and can take it to another manager if problems arise.
Many consultants are unconcerned about the transparency of hedge funds, saying many funds have addressed the issue already. Bill Muysken, chief investment officer for alternatives at consultancy Mercer, said: “We’re very comfortable that we’re on top of the positions that these managers are taking."
Muysken added: “Where DGFs aren't as good is they tend to have higher correlation with equities… [they] have an allocation to equities within them that makes them fairly highly correlated and reduces their effectiveness as a diversification tool."
He said other schemes have sought a return that is relatively cheap and less volatile than equities by combining passive equities and bonds with hedge funds.
Some hedge funds have struggled to meet their targets over the past few years, Brown said, but he added that many DGFs based their targets on 3-5 year cycles, rather than the annual targets favoured by many hedge funds.
Nick Secrett, director at consultancy PwC, said while DGFs may be a useful first step in diversifying away from equities, “you aren’t getting the same concentration of expertise” as you would in a hedge fund.
He added that, for larger investors, many hedge funds were open to negotiation around fees and transparency. “The larger the scheme, the more it’s a bespoke process," he said.
The Oxfordshire scheme is also carrying out discussions with the Berkshire and Buckinghamshire county council pension funds on possible collaboration.
