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