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Direct hedge fund and private equity fund investment increases

Date: Wednesday, February 25, 2009
Author: Giovanni Legorano, Professional Pensions

Pension funds continued to diversify into direct hedge funds and direct private equity, but are allocating significantly less to real estate, Watson Wyatt says.

Watson Wyatt said it conducted 30% more searches for direct hedge funds in 2008 compared with the previous year, while fund of hedge fund mandates fell as a proportion of total hedge fund searches from 44% to 35%.

It added mandates for single-manager hedge funds now accounted for around two thirds of searches - with long/short equity and multi-strategy being the most popular.

Watson Wyatt European head of investment consulting Paul Trickett said: "Diversification using alternatives is now commonplace, but it comes at a price with large demands on governance budgets and high fees.

"We have seen progress through better aligned fee structures recently and more pension funds are now either raising their game, by adding to their governance, or simplifying their strategy by moving to lower cost, passive solutions. These developments bode well for a better value proposition in this area."

According to the consultant, private equity investing continues to attract substantial interest from UK pension funds and the number of new mandates awarded increased by more than 40% in 2008 compared with 2007.

This was mainly due to larger funds implementing their diversification strategies directly rather than via funds of funds, which increased the number of selections.

As a result, Watson Wyatt said there were more direct allocations than fund of funds allocations in 2008, confirming a trend which started two years ago. Allocations tended to focus on mid-market buyouts and distressed strategies.

Watson Wyatt global head of manager research Craig Baker said: "The era of cheap and readily available debt combined with rising prices is over and the new world will reward those long-term and selective managers with strong track records of creating value through accelerating the earnings growth of their portfolio companies."

Last year UK pension funds awarded around one quarter of the number of real estate mandates than the previous year - taking searches back to levels last seen in 2003. There was a continuation in the shift away from pure UK real estate mandates to those including overseas allocations, the consultant said.