European pension funds have been slow to shift assets to higher-yielding investments such as hedge funds and private equity even as pressure is building to improve returns, according to Greenwich Associates' 2005 report on the European investment management industry. In fact, corporate pension funds have been returning to less risky absolute-return strategies overall, with the percentage of asset allocation in government bonds increasing to 29% from 27% for the two years ended Dec. 31. The change is being done to meet the demands of new accounting standards and increasing liabilities.
"The implementation of IFRS/IAS (accounting rules) has reduced the appetite to go into the riskier categories and is driving down risk tolerance," said Berndt Perl, Greenwich's managing partner. "This is a dilemma since they need more yield on the one side, but new reporting requirements are not helping."
The trend toward loss aversion is most obvious in the European hedge fund and private equity markets. This is not only due to the mark-to-market accounting implementation, which critics say penalizes risk-taking, but also to the lower-than-expected hedge fund returns. As a result, the percentage of European institutions planning to begin dipping into hedge funds decreased to 8% in spring 2004 from 23% the year before, and those expected to hire a hedge fund manager fell to 8% from 23% in the same period.