Pension Funds Unhappy With FoHF Returns

by Philip Morton, Investors Offshore.com

06 October 2006

Despite growing interest in the asset class, less than a quarter of pension schemes that invest in funds of hedge funds are satisfied with their investment returns, according to a new global survey by Mercer Investment Consulting.

The survey found that only 23% were satisfied with the returns offered by funds of hedge funds, while 48% were neutral and 28% were dissatisfied.

When asked to rate overall satisfaction with their funds of hedge funds manager, the survey of over 180 large pension schemes worldwide found less than half (47%) were satisfied.

Divyesh Hindocha, Global Head of Investment Consulting Policy at Mercer, observed that:

"The lack of satisfaction expressed by investors is likely to be due to a mixture of high expectations and fund managers not explaining their strategies clearly enough."

He continued: "While funds of hedge funds are attracting a great deal of attention, many investors are unclear about what they wish to achieve by investing in them, and what the funds can realistically deliver. If investors' objectives are unclear and their expectations are out of kilter with reality, there is scope for disappointment."

The survey also found that just 58% of respondents understood their funds of hedge fund manager's investment approach, although this varied from around a third in Europe and Japan to as much as 85% in Australia and New Zealand, where these funds have been available for longer.

Mr Hindocha commented:

"Fund managers that are transparent about their strategies and processes are more likely to attract investors and be able to manage their clients' expectations better."

Globally, a third of the pension funds surveyed (33%) invest in funds of hedge funds. Even though many of their expectations are not currently being met, the survey found that 54% intend to increase their allocations to hedge funds within the next two years. The greatest increase is likely to be in the US and Canada, at 62%, compared to 45% in Europe and 42% in Australia and New Zealand.

Of the pension schemes questioned that do not currently invest in funds of hedge funds, 19% said they are likely to within the next two years.

"Pension schemes look to funds of hedge funds to diversify their investment risk and sources of return. Allocations tend to be relatively small, but the more comfortable schemes become with the asset class, the more likely they are to increase their investments," Mr Hindocha explained.

Meanwhile, over a third of survey respondents (35%) expressed dissatisfaction with funds of hedge fund manager fees. On top of the underlying hedge fund managers' fees, funds of fund managers typically charge around a 1% management fee plus a 5% to 10% performance fee.

The survey was based on a sample of 181 pension funds globally.

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