Pension funds favour direct hedge fund investments

Date: Friday, March 11, 2011
Author: Ellen Kelleher, Financial Times

More pension funds are taking direct stakes in hedge funds and steering clear of funds of hedge funds to slash their fees and boost performance. Or at least that is the view of Simon Ruddick, an executive with the hedge fund consultants Albourne Partners who delivered a talk on the subject this afternoon at the National Association of Pension Funds Investment Conference.

A straw poll of pension funds conducted by Albourne reveals that 63 per cent are set to increase their direct exposure to hedge funds while just 2 per cent are looking to buy into funds of hedge funds, which carry a double layer of fees for management and performance. "It's a big shift in interest," said Mr Ruddick. "And in the 17 years I've worked in this business, I've never met an investor who went back to funds of hedge funds after getting out of them."

The relative outperformance of direct hedge funds is significant, noted Mike Powell, head of alternatives with USS, the UK's second-largest pension fund, who also spoke at the lecture on Thursday afternoon in Edinburgh. By Mr Powell's calculations,  £100m invested 10 years  ago would be worth £270m now if it were put  in direct hedge funds and £197m if it were socked away in funds of hedge funds. USS, which has £32bn in assets under management, only invests directly in hedge funds as a result of this disparity in performance. Mr Powell estimates that 30 per cent of the fund's 15 per cent allocation to alternatives is invested in hedge funds, with about £1bn in capital now invested with 17 hedge fund managers. "So far, so good," he concludes.