Pensions Still Wary Of HFs

Date: Monday, August 27, 2007
Author: Hedge Fund Daily

Pension plans are still wary about investing in alternatives, especially in hedge funds, according to a new white paper by Northern Trust. In a survey conducted by CREATE Research of some 300 fund managers and defined benefit plans sponsors in 37 countries, Northern Trust found that just half of respondents invested in hedge funds, and of those, only one out of 10 expects to invest more in the future. Another 10% that don’t invest now, are contemplating HFs over the next three years, while one-third have no plans to allocate to them at all. The average allocation to alternative investments by institutional investors, is around 3%, divided among hedge funds, property, private equity and commodities, which is surprisingly little considering the stated intention by many is to invest in them to achieve uncorrelated absolute returns and that more than 80% of those polled say their pension funds are underfunded. “There is a yawning gap between the aspirations of institutional investors and what they actually do in practice,” Mark Austin of Northern Trust says. “After the worst global funding crisis in living memory, most pension funds still don’t have the governance structure and investment expertise to achieve radical diversification.” Amin Rajan, CEO of CREATE and author of the report, adds, “Before making big allocations to alternatives, investors want to see step improvements in the risk-return characteristics of investing in alternatives. They also want something done about lack of transparency, high fees and illiquidity in these asset classes.” With that attitude, it may be difficult to fulfill the prophecy made earlier this year by Bank of New York that institutional investor assets in alternatives would nearly triple to $1 trillion in just three years.