Personal Pension  

Hedge fund managers ‘skin in the game’ can close pension gap

Hedge fund managers ‘skin in the game’ can close pension gap

Hedge funds can help pension funds to close the expectation gap between an adequate standard of living in retirement and what most people are currently on course to receive, according to the Alternative Investment Management Association.

Jack Inglis, the association’s chief executive, explained that the persistent low interest rate environment adds another challenge to the ability of pension funds to deliver on their basic objectives, since returns on traditional assets such as bonds are being squeezed.

He said: “It is therefore not a surprise that pension fund managers are increasingly turning to investment management alternatives such as hedge funds.

“As hedge funds have outperformed traditional assets such as stocks and bonds over the last 20 years, with less volatility and risk, they are now considered to be a safe and stable way to achieve returns and preserve capital.”

He was speaking at a parliamentary reception attended by several MPs and pension fund managers.

It marked the release of a joint paper by Aima and the Chartered Alternative Investment Analyst Association which found that one in every four dollars managed by hedge funds today is invested by public and private sector pensions.

The report argued many hedge funds are now known for their risk-management, not their riskiness, citing a recent Preqin institutional investor survey that asked what impact a withdrawal from hedge funds would have on their portfolio; 80 per cent responded that such an occurrence would increase, not decrease, their exposure to risk.

However, the research did concede that it has not been a story of unbroken growth or success, with 2008 seeing performance losses exceeding $300bn (£200bn) and during the fourth quarter alone, more than 750 hedge funds liquidated and investors withdrew more than $150bn (£100bn), according to Hedge Fund Research.

Since then, discussions have continued to persist about the pace of progress on issues like portfolio transparency, fund governance, fee levels and other issues.

It also noted that some hedge fund managers have been charged with insider trading and theft of client assets, with such publicity worrying for an investor but not necessarily representative of the wider industry.

Countering these negative aspects, report authors Mr Inglis and Caiaa chief executive William Kelly, stated that by co-investing alongside clients, hedge fund managers have “skin in the game” which aligns interests and incentivises prudent risk management practices.

“Hedge funds (as measured by the performance of the HFRI composite index) experienced a maximum drawdown in the last 10 years of only 21.4 per cent (between November 2007 and February 2009).

“Only bonds experienced a smaller drawdown (10 per cent) in this 10-year period, while real estate suffered a drawdown of 35 per cent, the S&P 500 a 57 per cent drawdown and commodities a 54 per cent drawdown.”

peter.walker@ft.com