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Abu Dhabi, UAEMonday 21 January 2019

Hedge funds lose appeal for pension pot managers

In a recent survey, pension funds overwhelmingly favoured global equities, selected by 64 per cent of respondents, with hedge funds garnering just 3 per cent

Hedge funds are at the bottom of the pile for pension fund investments. AFP
Hedge funds are at the bottom of the pile for pension fund investments. AFP

With global investment banks predicting a lacklustre 2019 for financial market returns, you might expect the guardians of pension assets to chase performance either by seeking the alpha promised by hedge funds or warming to Brexit-beaten UK stocks.

You’d be wrong on both counts.

Amundi, Europe's biggest fund manager, teamed up with Create-Research to survey pension managers across the European Union. The poll, published this week, covered 149 plans overseeing €1.89 trillion (Dh7.86tn).

Asked which investments they anticipate will deliver their targeted returns in the next three years, the funds overwhelmingly favoured global equities, which were selected by 64 per cent of respondents. Infrastructure, which has gained in popularity in recent years, came second and was chosen by 58 per cent. So how did hedge funds fare in the beauty parade?

They were selected by just 3 per cent of the survey participants, putting them 23rd out of 25 asset classes. Only currencies and gold garnered less support from the pension managers.

That's a pretty damning indictment of the industry's collective efforts to convince investors that it offers value for the higher fees charged. Unfortunately, that scepticism looks entirely justified.

Absent of a December rebound, the portfolios are poised to deliver negative returns for the year as a whole, according to an index compiled by Hedge Fund Research. That will mark the 10th consecutive year when pension managers would have been better off investing directly in the S&P 500 index. So as the steward of retirement nest-eggs, why would you consider allocating any of them to the hedge-fund crowd?

The survey sponsored by Amundi, which oversees €1.5tn, also makes bleak reading for anyone anticipating an end to the dismal performance of UK stocks, which have lagged their peers in recent months.

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Just 5 per cent of the retirement funds in the survey put the UK among markets that will deliver the best returns in the next three years, ranking alongside Latin America and beating only Canada. The study notes that uncertainty concerning how Brexit will be resolved means "the economy will remain sluggish and fragile".

With figures released on Wednesday showing growth in the UK services industry slowed to its weakest since after the Brexit referendum in 2016, the economy risks contracting in the fourth quarter. That's not a bullish backdrop for British firms that depend upon domestic demand for their revenue.

So what are pension funds buying?

With quantitative easing distorting the debt market, hard assets are increasingly being used as a surrogate for government bonds. "It is widely believed that the traditional 60:40 equity-bond portfolio will not meet return targets," the report says. The survey found that 62 per cent of those polled are investing in real assets, mostly property and infrastructure, to bolster performance in what's anticipated to be a low-return climate.

And that may prove fatal to the likelihood of hedge funds coming back into fashion. The biggest risk facing the industry in the coming year is becalmed markets making it more difficult for active managers to generate alpha.

Unless there's a swift turnaround in performance, pension plans will continue to snub them – and they're right to do so.

Bloomberg

Updated: December 8, 2018 03:32 PM

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