Pensions warned on hedge funds (as they lose billions on long-only funds)
Apr 22nd, 2008 | Filed under: Institutional InvestingThe Chief Investment Officer of Dutch insurance firm Interpolis told a conference audience recently that hedge funds and structured products will drag down pension returns in the future. Reports IPE.com:
“Lack of clarity on the value of illiquid investments may result in very disappointing returns of hedge funds and structured financial products, according to Bob Puijn, chief investment officer for pensions asset management at Interpolis. After the attractive returns seen over the last couple of years, pension funds may see twice the return but it is likely to be in the red rather than delivering a positive gain, he suggested during the spring congress of the Circle of Pension Specialists (KPS). As a result, pension funds enjoying a 10% gain until now could, for example, see a negative return of –20%.”
It’s certainly not unlikely that some pension fund somewhere will invest in a hedge fund or structured product that could lose 20% in the future. Although with overall hedge fund allocations in the low single digits for most investors, even that loss would only put only a small dent in returns.
But apparently pension funds have become quite adept at losing it on their own – without the help of such forecast hedge fund drawdowns. A Northern Trust study released today concludes US pension funds are down due to their long-only equity portfolios. According to the firm’s press release:
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There is truth in both statements and reality is probably somewhere in the middle. Pension funds should not only invest long only but also be very cautious when investing in hedge funds which have limited or no disclosure. Just like investing in long only equities, investing your money in a hedge fund, fund of fund, or having it invested by a third party; you need to do your research, know what you are buying and subsequently take the investment decision. So whether you invest in an oil company, or XYZ hedge fund, or ABC fund of fund or have your investments done by Fidelity => who is behind the company / fund?, what’s their strategy?, have they executed well in the past?, is the buying price / fee justifiable?, do you have shared interests with the management / managers?