IAM/LSE Hedge Fund Conference Panel Session Notes
by Dr. Ros Altmann
(All material on this page is subject to copyright and must not be reproduced without the author’s permission.)
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