European Pension Funds Look To Absolute Return Strategies

by Phillip Morton, Investors Offshore.com

24 August 2004

Current weakness in the equity and bond markets will drive more European pension funds to use absolute return strategies, such as hedge funds, in order to meet their liabilities, asset management firm Invesco revealed to Reuters.

"Clients are saying what matters are absolute returns because they can't tolerate on-going losses," Mark Dowding, Invesco head of global bonds said in an interview with the news agency.

"Five to 10 years ago European clients were happily invested in fixed income, then interest rates fell and they were persuaded to move into equities at the peak of the market. Now they have seen bad returns and are unhappy with fund managers saying we only lost 10% while the market was down 15%," he added.

Absolute return strategies have the ability to return a positive performance even when the markets are falling, unlike more conventional strategies closely correlated with the main equity benchmarks which can suffer heavy losses during a downturn.

From a UK perspective, a recent survey commissioned by global fund-management group Pioneer Investments, a unit of Unicredito Italiano, would seem to bear out the claim of higher demand for absolute return strategies. It found that 16% of the pension finds polled have already placed assets into hedge funds, while one-third are actively studying the possibility.

"They are enhancing performance in the sense that hedge funds outperform during a bear market," stated Nigel Meir, Pioneer's head of alternative investment sales in the UK and Scandinavia.

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