European pension funds increase weightings in alternatives

Pension funds boosted alternatives in 2008

Wed Apr 22, 2009 7:56am BST (Reuters)

LONDON (Reuters) - European pension funds continued to increase their allocations to alternative assets such as hedge funds and commodities last year, undeterred by the financial crisis, according to a report.

A study by Mercer Investment Consulting showed German, Dutch and British schemes all increased allocations to non-traditional asset classes.

The findings, based on 1,000 funds with combined assets of 400 billion euros (350 billion pounds), indicate pension schemes stood by hedge funds even as the asset class suffered its worst year on record.

Hedge funds lost more than 19 percent in 2008, according to Hedge Fund Research, and suffered heavy outflows.

In Germany, schemes increased allocations to alternative assets to 11 percent from 10 percent last year, Dutch schemes raised their weightings to 11 percent from 9 percent, and UK schemes to 6 percent from 4 percent.

UK schemes favour hedge funds, global tactical asset allocation, and active currency as diversification strategies and since the survey was completed over 50 percent more UK schemes have allocated to these asset classes, Mercer said.

Nine percent of British schemes have allocated to funds of hedge funds. Only two percent of UK schemes invest directly in hedge funds but the average allocation among those is 9 percent.

In Europe, 14 percent of pension schemes have allocated to funds of hedge funds, 12 percent to commodities, and 10 percent to high yield bonds. Of the 5 percent investing in single strategy hedge funds the average allocation is 12 percent.

Over two-thirds of schemes surveyed have been prompted to conduct investment reviews due to the financial crisis, with almost 70 percent reviewing counterparty risk and over half looking at their cash management programmes.

The survey showed over 70 percent of those schemes plan to review their stock lending programmes and 46 percent will review transaction costs.

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Report: Hedge Fund Assets to Fall to $1T Before Rebound
A new report says that hedge fund assets under management, which peaked at about $1.9 trillion in 2007, will retreat to a bottom of $1 trillion in 2009 before coming back strong. However, by 2013, the asset class will have almost $2.6 trillion, according to the report by Bank of New York Mellon and investment management advisory firm Casey Quirk entitled "The Hedge Fund of Tomorrow: Building an Enduring Firm." In March, hedge fund assets were down to $1.724 trillion, according to HedgeFund.net. Although investor redemptions were a serious problem for many hedge funds during the economic fiasco that was 2008, institutional investors accounted for less than 17% of net redemptions, the report said. When institutional investors were broken down further, pension funds accounted for only 3% of those redemptions. The study's authors expect that North American pensions will be the largest institutional investors in hedge funds between 2010 and 2013, followed by British and Northern European institutions. For those who predict that the funds-of-funds model might not survive scandals such as the Bernard Madoff $65 billion Ponzi scheme, the study has a surprising response: funds-of-funds are expected to oversee almost 50% of total hedge fund assets by 2013, as compared to 36% in 2005 and 17% in 2000. The study also made predictions about the four most "likely-to-succeed" hedge fund business models. Those are, the classic hedge single-strategy hedge fund, multi-capability platforms, merchant bank alternative mangers and combined alternative and traditional long-only managers.
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