HEERLEN, Netherlands - The giant Dutch pension plan ABP may take the unprecedented step of running some or all of its $70 billion equities portfolio as a long-short hedge fund strategy.
If approved, the move could allow the group's New York-based U.S. equities team to begin short selling stocks as early as the first quarter of next year.
ABP's long-short program could signal the start of a trend by European pension plans away from hedge funds into possibly cheaper long-short portfolios run by traditional money managers. Such a trend would pose a threat to the hedge fund sector, which has benefited from weak markets over the past few years and as a result attracted billions of dollars - increasingly, institutional assets.
"We are running a project to see if it is viable to run short positions in our long-only equities portfolio," said Hans de Ruiter, senior equities portfolio manager with Stichting Pensioenfonds ABP, Heerlen. "We are doing some research into the costs of going short, what the cost of prime brokerage is, and what the risks and the benefits are."
The board controlling the e150 billion ($148 billion) scheme is expected to make a final decision by December on whether the program will go ahead, Mr. de Ruiter said.
The project also involves developing and refining an investment model capable of taking short positions into account. "We are looking to see whether the process (of shorting) pays off enough to justify the effort," Mr. de Ruiter said.
Short selling, a common hedge fund strategy, usually involves borrowing a security from a commercial lender, then selling it on the market. The investor can profit from drops in stock value by then buying the security back at a cheaper price.
Bill Muysken, head of global investment research at Mercer Investment Consulting, London, said, "With long-only managers, a major constraint they have is they can't have less than zero exposure to a stock ... That inhibits the ways in which the manager can add value in the end."
The other major benefit is the possibility of lower investment management fees, he said. Hedge funds typically charge a hefty annual fee in addition to fees based on performance. Mainstream money managers traditionally have charged a flat fee rate, typically between 0.3% and 0.75% of assets, depending on the asset class.
Mr. de Ruiter said the natural markets in which to begin the long-short program would be the United States and Japan.
Meanwhile, other European pension plans signaled what might be the start of a price-inspired backlash against the hedge fund boom.
Criticism of fees
A number of senior European pension plan executives criticized the high fee structures of many hedge funds - especially fund of funds - at a conference in Amsterdam last month. (It is not clear whether ABP's decision to embark on its proposed long-short program also is related to investor complaints about hedge fund fees.)
Stephen Lowe, a consultant with Railpen Investments, the in-house consultant to the L16 billion ($24.46 billion) British Railways Pension Scheme, Durham, England, raised eyebrows among attendees at the Hedge Funds for Pension Funds Conference, which was largely sympathetic to hedge funds, by suggesting the net average historical return from hedge fund of funds was just 3%, or lower than the net average 5% return on fixed income.
Mr. Lowe said the British Railways plan, which to date has not committed assets to hedge funds, had considered allowing its equity managers to take short positions as a cheaper substitute for hedge funds, but had not done so because of government regulations.
Similarly, Fons Lute, chief investment officer of Blue Sky Group, which administers the e8 billion in pension assets for staff of the KLM Group, Amsterdam, drew the ire of a number of conference delegates when he publicly agreed with Mr. Lowe that hedge funds were expensive.