Hedge Funds Back In Vogue With Pension Schemes
Wednesday, February 03, 2010

There are signs that pension funds are showing renewed interest in hedge fund investment following one of the best years on record for hedge fund returns.

Hewitt Associates, a global consulting and outsourcing company, has said that with hedge funds posting the strongest returns in over a decade, its manager research team performed more than twice the number of hedge fund manager searches during 2009 in comparison with the previous year.

From late 2008 to early 2009, the hedge fund industry was hit by significant redemptions from investors, Hewitt noted, resulting in a number of fund closures. However, after this difficult period, broad based hedge fund indices were up by around 20% during 2009.

Guy Saintfiet, senior hedge fund researcher at Hewitt Associates said:

"The industry now seems to have put the worst behind it and assets have started to grow again due to a combination of performance and net capital inflows. The number of new fund launches also increased."

"We saw the market dislocations in 2008 as an opportunity for our clients to enter this asset class and to get exposure to hedge funds through the use of high quality managers in certain strategies, as well as via fund of funds. Not only have our clients benefited from strong risk adjusted returns, but we have also seen opportunities to renegotiate fees and significantly increase transparency levels with managers."

Saintfiet observed that after significant redemptions from leveraged and short-term oriented investors in 2008 and early 2009, hedge funds have realised they need a much more stable investor base.

"Pension funds are natural and ideal long term investors for hedge funds but require certain institutional standards to which many hedge funds did not adhere. As a result, hedge fund managers have started to address these shortcomings, by, for instance, increasing transparency and employing a third party administrator."

One of the strongest performing hedge fund strategies in 2009 was Distressed Investing, a strategy that invests in securities of companies that are either already in default of lending covenants, under bankruptcy protection, or in distress and heading towards such a position.

"Other strategies we favour for 2010 and beyond are Global Macro – making use of the imbalances created by a high level of government actions in all areas of the economy - which will likely see many opportunities as policymakers drive financial markets; and Long/Short Equity as we expect equity markets to show greater investment return dispersion among stocks and sectors, resulting in a favourable environment for the strategy," Saintfiet added.

"Our expectation, based on the amount of interest from UK pension plan trustees, is that 2010 will be another very active year for pension funds allocating capital to hedge funds," he concluded.

There is also renewed interest being shown by the largest pension funds across the pond. Calpers (California Public Employees' Retirement System), the world's largest pension fund, revealed in its end-of-year statement that it had conducted due diligence on 66 hedge funds.