Are UK-Based Pension Funds More Cautious Hedge Fund Investors Than Their Global Counterparts?

by Nat Auld

  • 19 Sep 2014
  • HF

Preqin’s Hedge Fund Investor Profiles online service tracks 106 UK-based pension funds which actively invest in hedge funds, or are planning on making their maiden allocation in the next 12 months.  Alongside this, there are a further 136 pension funds in the UK which have informed Preqin that they do not invest in the asset class - approximately a fifth of all pension funds which Preqin tracks  which are not currently exposed to the asset class. Preqin’s Hedge Fund Investor Profiles online service shows that UK-based pension funds allocate a smaller proportion of their assets under management to hedge funds than pension funds globally. Are these indications that UK pension funds are more conservative than their global peers when it comes to investing in hedge funds? This blog compares the investment preferences of UK-based pension funds to those on a global scale.

The average pension fund based in the UK allocates 9% of their total assets under management to hedge funds, compared to an average allocation of 10% by global hedge funds, according to Preqin’s Hedge Fund Investor Profiles. Not only do UK-based pension funds place a smaller emphasis on hedge fund investments, they also target lower returns, with an average target return of 5% compared to 6% for global pension funds.

When taking a closer look at the structural preferences of pension funds, Preqin’s data shows that UK-based pension funds have a greater appetite for managed accounts their global counterparts. Sixteen percent of UK-based pension funds allocate capital to managed accounts, compared to 11% of pension funds on a global scale, suggesting that these UK-based investors have a greater need for the transparency and control over their investments than their global counterparts.

Preqin’s Hedge Fund Investor Profiles shows that the average UK-based pension fund made its first investments into hedge funds in 2009, compared to 2007 for pension funds globally. As they are relatively new to hedge fund investments, it is possible that UK-based pension funds may begin to increase their allocations to the asset class over time.

Preqin’s data suggests that pension funds based in the UK have a more conservative approach to hedge fund investments, with a lower average proportion of total assets allocated to hedge funds, and a greater preference for managed accounts than global pension funds. However, as they are relatively new to the industry, we could see these pension funds place a greater emphasis on hedge fund investments within their portfolios over the coming years. Furthermore, as new EU regulation comes into force, increasing the transparency of hedge funds as well as improving investor protection, this relatively cautious group of investors may ramp up their interest in the asset class. 

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