1. A remedy for pension deficits
Lyxor’s Nathaniel Benzakien opened the event with a sobering reminder of the vast size of many pension fund deficits. Subsequently, a panel of pension fund allocators discussed their approach to alternative assets and their allocation.
Kathryn Graham, director of the BT Pension Scheme, the largest UK pension fund, said it has 2.5% allocated to hedge funds through both funds of funds and single manager funds. The UK’s second biggest pension fund, USS, now has 4% of its £32 billion of assets directly invested in hedge funds according to Roger Gray, the chief investment officer. The second largest US scheme, CALSTRS, has so far only allocated 1.5% of its $150 billion assets, but this proportion will grow over time. CALSTRS only started doing so two years ago, with macro and currency managers, who will soon be joined by commodity specialists, its Investment Officer Carrie Lo said. Both of these schemes are emphasising uncorrelated strategies due to their historically and persistently high equity weightings.
Currencies are one asset class that appealed to the panel. Simon Cox of consultants Mercer said that non-profit making participants created opportunities in the market, especially for emerging market currencies, an exposure USS leaves unhedged.
The proceedings opened with Anatale Kaletski, chief economist of Gavekal. He enunciated the broad theme that the world economic recovery is moving from recovery mode where growth rebounded to a new phase of steady expansion. To his mind, it means that the quality of the assets in investor portfolios will need to change.
Economic history: a new phase
Kaletski argued that over the past 15 years two crucial points have emerged about world economic history. One is that capitalism is an ever-changing, evolutionary process. Over 200 years it has gone through three phases – the classical model in the 19th century, the Keynesian reforms of the 1930s and the Thatcher/Regan revolution of the early 1980s – but is now entering a fourth phase. This is the transformational event that began with the post 2007-08 financial collapse and is expected to continue for many years. Kaletski is sure this will result in the evolution of a stronger system since crises, as Karl Marx noted, are a natural part of the evolution of market economies.
Overlaying these events are changes that he terms ‘unidirectional’, which are bringing about an irreversible transformation. Thus in quick succession over the past two decades the world has witnessed four mega-trends: the end of communism, the rise of Asia, the technology revolution and, finally, the attainment of supremacy for paper money over real assets like gem stones or gold.
More than 400 hedge fund industry professionals gathered at the Grange St. Paul’s Hotel in London at the event hosted by the Patron of the charity, Esther Rantzen OBE. Cabaret was provided by Alistair McGowan and the auction, featuring items such a signed Status Quo guitar and a luxury holiday in Barbados, was conducted by Lord Jeffrey Archer.
The event raised £250,000 for charities working with abused children in the UK. Last year, Hedge Funds Care UK made grants to a number of charities including Red Balloon for their work with severely bullied children, Barnardos for their project working with sexually exploited girls and young women and CSV, a program that trains volunteers to work with young people coming out of care. The UK charity has raised over £1 million through its annual gala events and numerous summer and cultural events held over the last five years.
Robert Mirsky, Chairman, Hedge Funds Care UK, said: “This was another great event and I would like to thank our supporters for their enthusiasm and continued commitment.
Jeremy Charles, Thames River Capital: Because most funds have performed well the fact that assets are flat means there has actually been a decline. I also wonder whether we are an industry. Did we lobby effectively on the mess that hit us? Why have we failed to get our story across? I don’t think we are an industry at all. I think we are a series of investment managers who are trying to manage money in a more modern style that the regulator hasn’t caught up with. We are a collection of investment management techniques.
Whatever we think about assets coming in, they are going to have to come back in a different way. Investors want absolute return investment capability. They want managers who can actually hedge and take away the risk. That is demonstrated by the assets that came in. But we have a reputation problem. The industry has to change.
Funds of hedge funds are not very good at showing underlying liquidity. Getting transparency and showing the liquidity we have is fundamental. Counterparty risk is another obvious issue from 2008. What are we doing about demonstrating how we manage counterparty risk? We weren’t very good at getting close to our investors and helping them understand it and the financing. We have to rework the model given the perception out there.