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Australian pension funds losing hedge fund appetite

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Australia’s $2.6tn pension market, one of the world’s fastest-growing pools of retirement capital, is reducing its hedge fund investments amid growing regulatory scrutiny over fees and performance, according to a report by Bloomberg.

Thee report cites data from research firm Chant West as showing that the average allocation to hedge funds in growth investment options across Australia’s AUD3.9tn pension sector dropped to just 0.6% in March 2024, down from 2.5% in mid-2020. AMP, for example, has halved its hedge fund exposure due to high fees, while Australian Retirement Trust, the nation’s second-largest pension fund, has completely eliminated hedge fund investments.

In an interview with Bloomberg, AMP’s head of portfolio management, Stuart Eliot, described hedge funds as “expensive” while noting that the fund has plans to increase its direct infrastructure investments.

A report from Goldman Sachs Group earlier this year found that global investor appetite for nearly every hedge fund strategy declined from 2023, as average management and performance fees reached their highest levels since 2015. High-performing multi-strategy firms like Millennium Management and Citadel are not accepting new investments readily, and other funds have lockup periods that are too long for some pensions to handle.

In Australia, the Prudential Regulation Authority’s annual performance test aims to identify underperforming portfolios and curb excessive fees. This scrutiny has led funds like Brighter Super, which manages AUD32bn, to avoid hedge fund investments. Chief Investment Officer Mark Rider explained: “Some of these hedge funds have promised a lot but haven’t delivered.”

Rest, an AUD85bn pension fund, decided in 2021 to reduce its hedge fund allocation to zero, citing a lack of transparency in how funds are managed. “The alignment of the owners to our members who care about sustainable development goals just couldn’t come together,” said Rest CIO Andrew Lill.

Despite the downturn in Australia, demand for hedge funds remains strong in other regions. Abu Dhabi and Dubai are actively courting hedge fund managers, offering incentives to attract industry leaders from New York, London, Hong Kong, and Singapore, while total assets in the hedge fund industry grew from around $2.9tn in 2015 to about $4.1tn by the end of 2023, according to data from Hedge Fund Research Inc, with global public pension fund allocations remaining steady at around 8-9%.

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