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February 18, 2006
UK Institutional Investors Favor Hedge Funds
In the United Kingdom, a trend worth analyzing is rolling on. Leading institutional investors such as the large pension funds, local authorities and charities are showing keen interest in alternative investment vehicles.
Many studies done to track this trend outlines that following a steady yet slow start about two to three years ago, the interest in alternative investments such as hedge funds is picking up. The pension funds in the United Kingdom are reportedly allocating a certain portion of their investment to funds of hedge funds.
Through this piece we are trying to review the developments in the UK institutional investment market, with the focus on investments into hedge funds over the last two years. The attempt is to highlight the role played by funds of hedge funds within pension funds’ asset allocation mix. According to a report by a leading investment bank, about one in six continental European pension plans reportedly invests in the hedge funds. Compared to this, the figure pertaining to the UK market seems nascent at about one in 50.
However, the dynamics are changing at a frantic pace, with a number of key pension schemes in the UK recently starting allocation to hedge funds, primarily through the fund of hedge funds route. A good example is of Railpen Investments, which includes the British Railways and the British Transport Police superannuation funds. It is planning to invest over GBP 600 million or 5% of its assets in funds of hedge funds.
Further, various local authorities are investing into hedge funds. Dorset County Council is reportedly allocating about GBP 45 million ‘or’ 5% of its scheme - to two funds of hedge funds. Such examples are a clear display of the risk appetite and the proactive approach, with overture of aggression. This trend should make the pension funds dynamics more competitive and aggressive.
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