Hedge funds have once again appeared in both financial and mainstream press as yet another pension fund has publically announced its intention to redeem its hedge fund holdings. It has recently emerged that West Midlands Pension Fund is planning to withdraw the entirety of its hedge fund portfolio. The £10.5bn UK-based public pension fund made its first investment in the asset class in 2009, and joins various other pension funds that have announced their intention to exit the space. We look at the activity of UK-based pension funds within the hedge fund sector to determine whether this may signify a wider trend among this investor group.
Preqin’s Hedge Fund Investor Profiles online service tracks 148 pension funds currently based in the UK, which have an average of £4.46bn in assets under management and allocate an average of 8.0% of their total assets to hedge funds. Their global counterparts, however, allocate on average 9.6% of their total assets under management to the hedge fund space. This suggests that UK-based pension funds are more conservative in their attitude towards the asset class.
Nevertheless, of all UK-based institutional investors initiating searches on Preqin’s Fund Searches and Mandates feature, 42% are pension funds. An example of a UK-based pension fund that is looking to make new hedge fund investments is Avon Pension Fund. The £3.5bn public pension fund recently issued a European Union (EU) mandate, worth £165mn, for companies to set up, implement and manage a diversified fund of hedge funds. Another example is Cornwall Council Pension Fund, which is set to allocate approximately 8% of its total assets under management to a managed account platform provided by Financial Risk Management (FRM).
In terms of strategic preferences, the most sought-after among the investor group are multi-strategy and long/short equity hedge funds, for which 38% and 37% respectively of UK-based pension funds state a preference. This exemplifies the cautious nature of UK-based pension funds as they seek absolute returns and to mitigate risk through diversification to protect their clients’ capital. Following behind are macro strategies (34%), managed futures/CTA (15%) and equity market neutral (12%) funds.
Although it would appear that some pension funds globally have lost faith in the asset class, data suggests that this is not reflective of a wider trend throughout the industry, particularly in the UK. Pension funds in the UK show an appetite for hedge funds and are attracted to the ability of the asset class to offer risk-adjusted, absolute returns. Although redemptions from the asset class will make headlines and generate poor press for the industry, such cases appear to be isolated.