Pension funds survey reveals 33% considering hedge fund investments

A new survey of UK pension funds reveal that 16% are currently invested in hedge funds whilst the remaining 33% are actively looking at the asset class.

The survey analysing UK pension fund attitudes to hedge funds was conducted by Pioneer Alternative Investments.  The survey covered 94 pension funds with combined assets of over GBP 77 billion.

It shows a clear divide in attitudes with almost half (49%) of those surveyed saying they are either invested in or considering investing in hedge funds.

Other key findings are summarised below:

• Of those already invested in hedge funds 12% are planning to increase their allocation during 2004-2005.

• Funds of Hedge Funds (FoHF) are overwhelmingly the most preferred hedge fund vehicle with 86% invested in FoHF alone over single strategy and single and FoHF.

• Almost three quarters (73%) of those already invested in hedge funds said they invested for performace enhancement. The remaining percentage invested for defensive reasons.

• The most important reason for not considering hedge funds is the concern that that they carry a high level of undefined risk (35%) and a concern over high fees (26%). Equal percentages rated concern that hedge funds are a fad (12%) and that their pension fund was too small (12%) as reasons.

• Potential investors see absence of transparency as the most problematic issue to hedge funds at present (38%). Fees are ranked 2nd (26%), followed by performance risk (22%) and high gearing or leverage (14%).

• When deciding which hedge funds to invest in the survey revealed that the most important criterion is track record, with length of time in business the second most important factor. 92% of respondents said a good track record was in the top two criteria when selecting managers and 67% rate length of time in business as the 2nd criteria.

Commenting on the findings, Nigel Meir, Head of Sales and Distribution, UK and Scandinavia said: “These findings demonstrate how a significant portion of the UK pension fund market is now open to investing in hedge funds. The fact that close to 50% of UK pension funds are now investing in or considering investing in hedge funds (33%) shows that the industry is making huge strides in persuading scheme managers and trustees of the benefits of hedge fund vehicles.”

He added: “Nevertheless the results show that some outdated perceptions do remain and this could result in certain schemes failing to fully understand the risk reduction strategies that hedge funds can bring to efficient portfolio management. For example the focus on fees indicates that some UK pension funds have not yet accepted that hedge funds fees must be measured in a different context to long only fees. The absolute return objective of a hedge fund means the assessment of a strategy should be more to do with whether it has delivered on its return objective rather than simply how much it has cost. If proof were needed the dramatic bear losses of recent years shows than an excessive focus on fee levels may distract from other important factors.”

“Unsurprisingly the survey shows that the most important reason for not considering hedge funds is the concern that they carry a high level of risk. Although overdone, the risk concern is understandable but we believe that as hedge funds continue to deliver and investor understanding improves the asset class will increasingly enter the mainstream.”

Background Note: Pioneer Investments is a global investment management group with over EUR 124 billion of assets under management as at 31 July 2004. Pioneer Alternative Investments (PAI) was formed in 1998. Since then PAI has built up a comprehensive range of alternative investment products which include single strategy, multi-strategy and funds of hedge funds. The flagship single strategy fund, Pioneer Global Opportunities Plc, was the first European-based hedge fund to receive a fund rating from Standard & Poors. PAI’s fund of hedge funds range was enhanced following the acquisition of the Momentum Group in 2002. Pioneer Alternative Investments had total assets under management in excess of EUR 3.7 billion as at end of July 2004. Pioneer Investments and Pioneer Alternative Investments (PAI) are trading names of the Pioneer Global Asset Management S.p.A. group of companies (PGAM). PGAM is a wholly owned subsidiary of UniCredito Italiano S.p.A.