LONDON - Three heavyweight U.K. pension plans - AstraZeneca, Unilever and Sainsbury - are getting serious about investing in hedge funds, and fund-of-funds arrangements likely will be their investment vehicle of choice.
Trustees for the L2.1 billion ($3 billion) AstraZeneca U.K. pension plan, London, announced this month that they would be putting L70 million, or 3% of plan assets, into hedge funds using funds of funds.
And Unilever PLC and Sainsbury PLC, also of London, expect to allocate portions of their pension plan assets to hedge funds by the end of the year.
The main attraction of a fund-of-funds approach was that it enabled AstraZeneca to diversify its allocation to hedge funds, a new area for the pension fund, said David McGregor, chairman of the pension plan's investment committee and group finance controller.
Plan officials were keen to implement as broadly diversified an investment strategy as possible, he said.
Fixed-income investments account for 44% of plan assets and passively managed equities, 28%. The balance of the fund, including the allocation to hedge funds, is invested with a number of boutique managers and includes mandates for high-yield bonds and small-cap stocks.
He would name neither the plan's money managers nor the firm awarded the hedge fund mandate.
Unilever's corporate pensions division is researching institutional hedge funds to see which strategies would be suitable for its e21 billion ($19.5 billion) in international pension plans, said Philip Lambert, global head of pensions and pension fund investments.
List of criteria
The corporate pensions team will work with the largest funds to draw up a list of criteria that a hedge fund would have to meet to be selected for mandates.
"The most important are a clear investment strategy and investment process. We don't want a magic box approach where the money manager doesn't disclose details about the investment strategy," Mr. Lambert said.
Local pension managers still have to decide the investment vehicle they would prefer, although it is likely the group would choose a fund-of-funds approach. "That would be a good starting point for diversification," he said.
The group initially will invest 1% to 2% of plan assets in hedge funds. This may be increased to as much as 5% over time, he added.
Mandates are unlikely to be awarded until the end of the year, and local trustees will not be forced to invest in the asset class. But Mr. Lambert expects interest in the asset class from the company's largest pension plans: the e7.3 billion Superannuation Fund, London; e4 billion Stichting Unilever Pensioenfonds, Rotterdam, Netherlands; e2.5 billion Unicare and 401(k) plans, Sage, N.J.; e1.5 billion Pensionskasse Berolina, Hamburg, Germany; and e400 million Fonds des Pensions "Union," Brussels.
The L2.8 billion Sainsbury PLC Pension Plan will take a serious look at investing in hedge funds once its consultant Frank Russell Co., London, completes an asset-liability study, which is expected to be in July.
"We are looking at it as an asset class within the context of other alternative investments, including venture capital and private equity. It could be a useful asset class in terms of improving returns and reducing risk," said Geof Pearson, secretary to the fund.
Luke Ellis, managing director of hedge fund manager Financial Risk Management Ltd., London, believes most U.K. pension plans will take the fund-of-funds route if they invest in hedge funds.
"If you want diversification against your underlying asset base you want absolute returns, so there is no question that you want a portfolio of hedge funds," he said.
But Andy Barber, head of manager consulting for William M. Mercer Ltd., London, warned hedge funds might not be a suitable asset class for all pension plans, particularly poorly funded plans or those with short-term investment horizons.
Hedge funds should be viewed as a strategic option within the fund's total allocation to alternative investments, he said.