UK Pension Funds

Hedge fund managers have expressed frustration that UK pension funds have been slow to diversify into alternative assets. There are many reasons for this. The actuarial investment consultants who dominate trustee investment thinking have always believed long-only equity investment is the best way to maximise long-term returns. They have not spent enough time trying to understand what hedge funds can do, having been deterred by the perception of hedge funds as high-risk, high-fee, highly geared, unregulated vehicles which are too complex.

But the hedge fund industry itself is probably partly to blame too. It has failed to explain clearly that hedge funds are not all the same, how they can reduce portfolio risk, that many hedge fund styles are not highly geared, nor the benefits of downside risk control in helping trustees reliably meet liabilities in mature pension funds. Trustees are often unsophisticated investors and need to be educated to better understand the complex concepts of hedge fund investing. If hedge fund presentations are not pitched at a level which the intelligent layman can understand, then the trustee audience will be lost in the first few minutes and may simply switch off, thus losing the value of the presentation and failing to appreciate the benefits of diversification into alternative assets.

History of UK pension fund asset allocation - over-reliance on long-only equities

UK occupational pension funds are in deep trouble. Final salary schemes have become too expensive for many employers, and companies are struggling to finance enormous deficits. There are many reasons why this situation has arisen, but inappropriate investment allocations have played a significant role. For far too long, UK employers were relying on equity investments to deliver long-term growth and meet pension liabilities, and this ideology appeared to be validated by exceptionally strong equity returns until 1999.