Interest in hedge funds has been growing amongst London borough pension funds over the past few years. Preqin’s Hedge Fund Investor Profiles database currently tracks nine of these schemes that are actively investing in hedge funds and a further five have active plans to consider investments in the asset class over the course of 2012. Although this is still less than half of the 32 London Borough pension funds, it is a big increase since 2009 when only three London Borough pension funds had hedge fund holdings.
There is evidence that the popularity of hedge funds amongst London borough pension funds is growing and there is the potential for this to grow further over the next few years as investors become more comfortable with investing in the asset class. London Borough of Camden Pension Fund plans to make its maiden hedge fund investment by committing 5% of its total assets to a fund of hedge funds by the end of Q1 2012. In addition, several other pension funds are receiving education on the hedge fund asset class with a view to making allocations later in 2012.
Overall the nine London borough pension funds active in hedge funds allocate an average of 9.2% of their total assets to the asset class. London Borough of Enfield Pension Fund is the most active investor in hedge funds, committing almost 20% of its total assets under management to six single manager hedge funds. As most of this investor group are relatively new investors in the hedge fund area, they tend to invest with established managers with a strong track record. Funds of hedge funds are the preferred method of investment for these pension funds and two-thirds invest in the asset class solely through this method.
There is plenty of evidence to suggest that interest in hedge funds amongst London borough pension funds is continuing to grow and this provides an opportunity for hedge fund managers to attract capital over the next few years. At present the majority of London borough pension funds look to allocate to experienced fund of hedge funds managers as they are still in the early stages of investing in the asset class. Once these investors gain confidence in investing in hedge funds it is likely they may branch out into direct investments and consider increasing their overall exposure to this area.