2015 has witnessed an increase in the number of London-based public pension funds active in the hedge fund space, in spite of continued scrutiny regarding fees and increased calls for transparency. Twelve of the 32 London-based public pension funds currently include hedge funds within their investment portfolio, compared with the nine of 2014. Together, these 12 pension funds have over £20.3bn in assets under management (AUM), with an average current allocation to hedge funds of 10.2% (an increase from 2014’s 8.9%).
Another notable change in 2015 is the proportion of pension funds utilizing direct hedge funds now being greater than those investing solely via funds of hedge funds. In 2014, 78% considered solely fund of hedge funds investments, whereas as of August 2015, 64% make solely direct hedge fund investments. This is likely due to gaining more hedge fund experience, having been active in the space for five years on average.
The London Borough of Barking & Dagenham Pension Fund began investing in hedge funds in 2014 and has an allocation of 5.81%, with seven hedge fund investments within its portfolio; it gains exposure via direct investments only. In contrast, the London Borough of Enfield Pension Fund has been investing in the space since 2007; it considers only direct investments and has a 25% allocation to hedge funds, with three vehicles currently in its portfolio.
With more London-based public pension funds now investing in hedge funds and a greater proportion gaining exposure via direct investments, it will be interesting to see whether fund managers will seek to make their offerings more attractive to such investors in a bid to gain their capital. This may be done by altering fees and increasing transparency, with London Pensions Fund Authority being one investor that has vocally criticized high fees recently.