Private sector pension funds have been increasing their hedge fund allocations over the past two years. This investor group currently has an average current hedge fund allocation of 9.5%, an increase from 9.3% in 2012 and 8.2% in 2011. Private sector pension funds are investing more capital in hedge funds than the previous five years demonstrating they are gaining confidence in the asset class. Preqin’s Hedge Fund Investor Profiles database currently contains profiles for 587 private sector pension funds which are active in hedge funds.
In terms of the locations of private sector pension funds with active hedge fund portfolios, 53% are based in North America, 36% are based in Europe and 11% are based in Asia and Rest of World. North America-based private pension funds have the highest average current allocation to hedge funds of all private sector pensions, with a mean allocation of 11.3%. Private sector pension funds in Asia and Rest of World have a similar mean allocation of 11.1% of total assets but Europe-based private sector pension funds are more conservative than others globally, with a lower average hedge fund allocation of 6.8%. The CHF 1.5bn Swiss pension Schindler Pensionskasse is an example of one Europe-based private sector pension fund which has reduced its allocation to hedge funds this year.
Over the past two years, more private sector pension funds have begun investing in hedge funds directly. The proportion of private sector pension funds investing in hedge funds solely through direct investments has increased to 29%, from 26% in 2011, and over the same period, the proportion investing solely through funds of hedge funds has decreased from 49% to 40%. This move is likely to be a combination of the recent poor performance of funds of hedge funds and private sector pension funds gaining more experience of constructing hedge fund portfolios. The most common hedge fund strategies among private sector pension funds are long/short equity (63% of private sector pension funds indicate a preference for this strategy), multi-strategy (60%), macro (41%), event driven (36%) and long/short credit (30%).
The current mean target hedge fund allocation among private sector pension funds is 9.4%, suggesting that many of these investors are operating at close to their targeted exposure to the asset class. However, a number of private sector pension funds plan to invest further in hedge funds over the coming 12 months. The $2.9bn Michelin US Pension Plan will make new hedge fund investments this year as part of plans to increase its hedge fund allocation from 8% to 11%. Private sector pension funds as a whole have increased their hedge fund allocations over the previous 12 months and this investor group is likely to continue to present investment opportunities for fund managers in 2013.