SANTIAGO - Regulators in Chile continue to balk at allowing privatized pension managers, known as AFPs, to invest directly in hedge funds, but acknowledge they would approve AFP allocations to structured products whose underlying investments employed hedge strategies.
So far, no such investment funds have been approved.
AFP portfolio managers say access to hedge funds would rein in risk on international allocations, which are overwhelmingly biased toward long-only equity mutual funds. The AFPs, which manage the Chilean public's obligatory social security savings as well as some voluntary contributions to 401(k)-type plans, were allocating US$4.5 billion of their $35.9 billion in assets to internationally domiciled mutual funds as of March 31.
"These instruments allow absolute returns and to go short on positions," said Juan Cristóbal Alcalde, head of international investments for AFP Provida, Chile's largest pension manager, with $11.2 billion in assets. "They give us a negative correlation with respect to the markets and a high degree of portfolio diversification."
But hedge funds have some hurdles to overcome before they end up in the portfolios of AFPs. Asset managers interviewed for this article acknowledged that the conservative nature of the AFP business doesn't mesh well with the checkered past of hedge funds, and everyone is fearful of the consequences should there be another blowup like that involving Long Term Capital Management. Over the years, the AFPs have had to suffer through crises that left fund affiliates questioning the professionalism of management.