Big British local authority pensions step up hedge fund
bets
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[December 14, 2017]
By Maiya Keidan, Carolyn Cohn and Simon Jessop
LONDON (Reuters) - From Essex binmen to
Liverpool councillors, government pension schemes in England and Wales
are investing more in hedge funds whose bets, sometimes dictated by
algorithms, have included exotic holdings such as Puerto Rican debt.
Those running local authority retirement pots have been reluctant to
advertise their hedge fund holdings, but a Reuters survey reveals that
the value of such investments by the 10 largest schemes in England and
Wales rose by a third to 2.2 billion pounds ($2.9 billion) in the year
to the end of March.
This backing for an industry which some investors criticize for its high
fees and relative lack of transparency has led some finance experts to
warn that hedge funds expose the pensions of ordinary people to risk and
volatility.
"Diversification is good but if you are overstretching for yield and
take too much risk, buyer beware," Peter Hahn, professor at the London
Institute of Banking and Finance, said, citing the problems experienced
by local governments which deposited funds with Icelandic banks before
their 2008 collapse.
In their quest to get better returns for their members during a period
of low yields in bonds, assets invested in hedge funds at nine out of
the top 10 schemes analyzed by Reuters rose during the period, in part
due to performance gains, while three pension funds added new hedge fund
managers and none were dropped, the Reuters survey found.
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The 10 schemes - which control around 100 billion pounds of the 259
billion pounds within Local Government Pension Schemes (LGPS) in England
and Wales - had 2.3 percent of their assets allocated to hedge funds in
the year, up from 2.1 percent a year earlier.
Schemes in England and Wales accounted for almost 10 percent of
Britain's total pension fund assets at the end of 2016, a report from
Willis Towers Watson shows.
While a direct comparison with investments by other pension funds is not
possible because most are not required to give the same level of
disclosure, several funds, such as Rhode Island in the United States and
British Rail, have reduced their hedge fund exposure or dropped it
entirely.
But just one of the 10 funds analyzed - Labour-run Greater Manchester -
said it had no hedge fund investments. Six out of the nine schemes where
hedge fund assets rose were controlled by the left-wing Labour party,
which is the main UK opposition.
"Our longstanding view is that hedge funds are far too expensive,
insufficiently transparent (despite recent improvements) and do not
appear to provide the sustainable returns required," a spokeswoman for
Greater Manchester said.
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ALTERNATIVE APPEAL
For Chris Rule, chief investment officer of Local Pensions Partnership, a tie-up
between London Pension Funds Authority (LPFA) and Lancashire, hedge funds appeal
because they offer an alternative that is not tied to mainstream investments.
"What we are looking for is something that is independent," he said. "It may do
badly (and) it may do well, at different times. The critical thing is it doesn't
move in lock-step."
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For the purposes of the survey, Reuters defined a 'hedge fund' as either a fund
that charged a performance and management fee or was described explicitly as a
hedge fund, although the schemes were often reluctant to do so.
LPFA added three investments in hedge funds in the 12 months to end-March, in
Winton Capital, GSA Capital Partners and Graham Capital Management, amounting to
213.5 million pounds. All three hedge funds declined to comment or did not
respond to requests.
The new LPFA investments were all in computer-driven funds that follow market
patterns, trends or momentum -- a strategy that also appeals to Merseyside,
which invests in Winton too.
New investments from other pension funds this year included a so-called 'fund of
hedge funds' that invested in other hedge funds and an emerging markets
strategy.
Reports by the local government pension funds in the Reuters survey show that
total assets in the schemes rose 21 percent to 97.8 billion pounds in 2017. Much
of this is accounted for by gains in the value of investments, due to rising
stock markets.
"Part of it is that equities have had such a good run over the last 10 years,
LGPS are traditionally very big equity owners and looking to take profits and
looking for alternatives elsewhere," said Colin Cartwright, partner at
consultant Aon Hewitt. "One of those alternatives will be hedge funds."
“Hedge funds are something that provide a different return stream to equities.
They should provide some sort of diversification, especially if markets get
choppy from here.”
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West Midlands, the second-largest LGPS in England and Wales, had five
investments in hedge funds at end-March 2017, up from four at end-March 2016,
but did not respond to requests for comment on asset size and therefore their
assets could not be included in calculating the total investments.
Other pensions included in the Reuters analysis were Essex, Lancashire, West
Yorkshire, Tyne and Wear, South Yorkshire and Hampshire.
($1 = 0.7491 pounds)
(Reporting by Maiya Keidan, Carolyn Cohn and Simon Jessop; editing by Alexander
Smith)
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