Personal Pension  

UK pensions swap huge hedge fund fees for shoddy returns

UK pensions swap huge hedge fund fees for shoddy returns

UK pension funds are paying up to 36 times more in fees and charges to invest via hedge funds compared to low cost index funds, but get back as little as one third of the returns.

Research by SCM Direct - an investment manager for low cost exchange traded funds - estimated UK pension schemes paid £2.85bn in fees and charges for their hedge fund investments in 2015.

According to the firm, due to poor transparency on costs and holdings, many members will be unaware of the overall extent of the true costs.

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SCM Direct’s research found many pension schemes do not disclose the total costs and fees or a full list of hedge funds within their annual pension fund statements.

The Financial Conduct Authority in June found ‘since the financial crisis, institutional investors - largely pension funds and endowment-like institutions - have become the largest source of new money for hedge funds.’

A typical UK pension fund invests six per cent of its assets in hedge funds, with many increasing their exposure in recent years, despite poor performance.

Previously the main buyers of hedge funds, high-net worth individuals and family offices, now own only 13 per cent of these assets, according to FCA figures.

SCM stated over the last five years a simple 60/40 strategy via index funds would have beaten the average hedge fund return by three to four times.

At the same time, hedge fund managers have been enjoying lavish pay. The average profit available for distribution per senior executive or fund manager of an average large UK hedge fund was £3.26m, with an average staff remuneration of £252,320 in 2015, according to SCM’s research.

The research noted pension funds investing via hedge funds are estimated to contain 4.9m members; 2.2m of which are invested through 31 different local government pension schemes.

ruth.gillbe@ft.com