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IAM/LSE Hedge Fund Conference Panel Session Notes

by Dr. Ros Altmann

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What are the benefits of hedge fund investing for the pension fund investors?

- improve portfolio efficiency
- potential to enhance returns, low correlation
- downside protection
- better use of manager skill
- more potential to exploit inefficiencies in investment markets
- long/short equity funds have enhanced return potential relative to long only

How important is it for pension fund investors to benchmark performance?

- each pension fund must assess its own liability profile
- scheme specific benchmarks
- not just ‘maximise returns and minimise risks’
- aim to outperform liabilities
- problem of lack of matching assets – duration, limited price indexation, longevity
- peer group and index benchmarks not really relevant

Is consistency of returns and lack of correlation more important than returns to institutional investors?

- distinguish between defined benefit and defined contribution
- diversification of portfolios and low correlation very important for long term returns
- lack of correlation and consistency of returns are important factors determining long term risk-adjusted returns
- Liabilities are more important than long term returns for defined benefit schemes
- Maximisation of returns more important for defined contribution

How should we try to understand the different types of hedge fund investing?

Direct investment in hedge funds

- very high investment minimum
- high specific fund risk
- need to have more than one fund – just like having more than one stock in a portfolio
- which strategy to choose?

fund of hedge funds

- much lower investment minimum
- achieve spread of investments
- leave manager and strategy selection to ‘experts’
- can specialise in one strategy e.g. long/short equity, relative value, zero beta
- cost of due diligence borne by fund of funds – economies of scale

structured notes, structured notes with leverage, swaps

- help to match liabilities – inflation swaps, extend duration
- but can’t match longevity risk

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