Private sector pension plans increasingly shunning hedge funds, says Preqin

31 Jul, 2012

Private sector pension plans appear to be cutting their hedge fund exposures, according to data provider Preqin.

“The private sector entered hedge funds in 2008 at quite possibly the worst possible time and built up rather large exposures with hedge funds whereby they accounted for an average of about 8% or 9% of their portfolios. Having been burnt in 2008 and seen less than stellar returns in 2011 and 2012, we are speaking to a lot of private sector pension plans who are cutting their exposures. Hedge funds now account for roughly 6% of these institutions’ portfolios,” said Amy Bensted, head of hedge fund data at Preqin in London.

According to Hedge Fund Research, hedge funds lost 5% in 2011 and are struggling in 2012 having delivered an average of just 1.87% to their investors year-to-date. Many hedge fund managers have said privately the industry must deliver absolute returns in 2012 so as to justify its worth to investors.

Nevertheless, many private sector pension plans appear to have lost patience already. Bensted said a lot of private pension plans are trending towards more traditional investment funds such as long-only equities, bonds and mutual funds.

She added many private sector plans appeared to lack the knowledge and resources when it came to hedge fund investing. “A lot of private sector plans couldn’t understand why they got hit so badly by the exposures to hedge funds so many just feel it is safer to move out into other asset classes. Furthermore, there are often just one or two key personnel focused on these investments,” she said.

The majority of private sector pension plans exiting hedge fund strategies tended to be located in northern Europe and Asia. “A lot of these institutions are conservative and feel hard done by with their hedge fund exposures post-2008,” said Bensted.

Conversely public sector pension plans have been embracing hedge funds. “According to our database, public sector plans have been increasing their exposures from 3.5% several years ago to about 6% today. However, this increase has not been as substantial as we had expected and I believe the public sector plans’ exposure to hedge funds is about to plateau,” said Bensted.

Pension funds have been heavily courted by hedge funds of late. A Towers Watson survey revealed hedge funds accounted for 9.8% of the top 100 alternatives funds, which pension plans had exposure to. However, pension funds are heavily constrained by concentration and risk limits, as well as their large ticket sizes, which force them to allocate only to the biggest managers. A J.P. Morgan survey revealed 67% of pension plans would not consider a sub-$250 million hedge fund.

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