Mitesh Sheth, investment director, Henderson Global Investors, singled out loans, mortality bonds and carbon emission trading as examples of assets which could confer a first mover advantage since currently they were being ignored by UK pension funds.
Taking the road less travelled in the pursuit of lucrative assets is easier to countenance when you are already familiar with non-traditional avenues of investment. Many would say leave it to the likes of CalPERS, ABP or USS – pension fund heavyweights with the resources, expertise and experience to take bold initiatives. Medium-to small-sized schemes which have ventured into alternative assets, have confined themselves to the popular funds of funds route. In the hedge funds arena, such vehicles have tended to produce lower returns than single manager investments.
The latest survey of European institutional asset allocation by Mercer Investment Consulting highlights the extent to which UK pension schemes lag their continental counterparts in allocating to alternative assets. An average aggregate investment of 3 per cent in cash, property, hedge funds and private equity in the UK stands in marked contrast to a 22 per cent allocation in Switzerland, 19 per cent in Spain and 14 per cent in Germany.
Mercer found that the proportion of pension schemes with exposure to hedge funds is almost 50 per cent greater outside the UK, with 9 per cent of pension schemes on average investing, compared to 6 per cent in the UK. However, where allocations have been made to hedge funds in the UK, they have been larger, averaging at around 9 per cent of assets.
While the research shows that UK pension funds are still learning to walk in terms of their relationship with alternative investments, the pervasive and underlying influence of investment consultants has a significant bearing on demand for both traditional and non-traditional assets in the UK.
Four years ago it was hard to find a consultancy firm with in-house expertise on hedge funds and this at a time when hedge fund managers were already trying to woo pension funds at investment conferences around the world. Although the consultants have since been converted to the cause of hedge fund investing, many advocate funds of funds vehicles which arguably are going to generate smaller and smaller returns as institutional investment rises.
And given that consultantshold the key to institutional investor demand for alternative investments, how long will it be before we see critical allocations to assets such as property and private equity, let alone infrastructure and carbon emissions trading?
Let battle commence
Battle has been truly joined in the hedge fund arena. In the red corner, stands the fund of hedge fund, weighed down by a much-maligned extra layer of fees but still able to boast a heavy one-two of manager selection and monitoring skills and an institutional fan base.
In the blue corner, stands the nimble managed account platform boasting a deft left-right combination of transparency and liquidity. It too has found popularity among institutional investors.
In the green corner sits the rookie replication strategy, a low-cost proposition keenly eyeing the performance of established hedge fund strategies. Just new to the ring, it has already been dismissed as a cheap upstart.
Absolute Return Partners (ARP), a London-based asset management and investment advisory firm, has launched a stinging attack on hedge fund replication strategies which it contends will always be a step behind the hedge funds whose returns they seek to replicate.
Jan Vilhelmsen, a partner at ARP, claimed that a hedge fund cannot be cloned until you know what and where it has been trading. “And by the time the replication funds figure it out, the hedge funds have moved on.”
He contended that due to a rise in correlations with global equity markets, 70-80 per cent of all hedge funds offer investors limited or no hedge against their traditional investment portfolios. It is this percentage which ARP thinks is prone to cloning by the investment banks.
Not surprisingly, the firm has absolute return products of its own to sell, multi-strategy portfolios comprising a mix of alternative assets.
Eoin Murray, CIO of Old Mutual Asset Managers UK takes a more sanguine view of the competitive challenge posed to his own multi-strategy hedge fund, a managed account platform.
Acknowledging that hedge fund replication strategies might appeal to some investors, he maintained that they do not lessen the appeal of “true alpha generators, be they single strategy, multi-strategy or funds of funds”.
Henry Smith, editor
henry.smith@ft.com
