Pension Funds Should Invest More In Hedge Funds, Says UK Pensions Guru

by Carla Johnson, Investors Offshore, London

25 October 2006

Paul Myners, pensions adviser to the UK government and chairman of fund of funds manager Ermitage Ltd told the Hedge 2006 conference in London last week that pension funds should invest a third of their assets into hedge funds.

Currently, less than 3% of pension funds in the UK invest in hedge funds. Said Myners: “The traditional ways of running pension funds are complete nonsense. We were paid performance fees for losing our clients’ money, I explained to my mother.” Myners blames both trustees and consultants for the low hedge fund exposure rate. “Trustees spend very little time on investment matters. They do not challenge the advice of their consultants because they are not confident enough and do not have an economic incentive to do so,” he said.

Hedge 2006 is a two-day conference aimed at hedge funds and their investors including European pension funds, insurance companies, family offices, endowments, charities, trusts, private banks and other asset allocators. The Hedge 2006 speakers' roster included Paul Myners, Sir John Gieve, Deputy Governor, Bank of England, and member of the MPC, Gavyn Davies, former BBC Chairman and Founding Partner, Prisma Capital Partners, Alexander Ineichen, Managing Director, UBS Global Asset Management, Alan Brown, Head of Investment, Schroders, and Daniela Klingebiel, Principal Investment Officer, The World Bank Pension Fund.

Despite Mr Myners' strictures, institutional demand for hedge funds will triple by 2010, according to a new study released recently by The Bank of New York and Casey, Quirk & Associates LLC.

The study, entitled “Institutional Demand for Hedge Funds 2: A Global Perspective,” found that by 2010 institutions investing in hedge funds will increase to nearly 25% of all institutions, up from 15% today, representing a more than 60% increase. Retirement plans globally will account for the vast majority of asset flows, with corporate and public pension plans in the United States accounting for the largest percentage increase overall.

“Broadening acceptance of alternative investments coupled with lower expected returns from traditional investments are driving demand for hedge funds among global institutional investors,” said Brian Ruane, executive vice president at The Bank of New York. “Institutional investors are increasingly recognizing that hedge fund allocations have provided significant diversification benefits while delivering the net returns they require.”

The study found that the vast majority of institutions investing in hedge funds use either fund-of-hedge funds exclusively or the “dual approach” model – accessing hedge funds concurrently through fund-of-hedge funds and direct investments. Fund-of-hedge funds will remain the starting point for the majority of institutions initiating a hedge fund investment program. The study predicts that half of global institutional flows will go to fund-of-hedge funds with the other half going to direct investments over the next five years.

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