Officials from some of the top pension funds globally are ramping up their internal absolute-return capabilities.
Driven by inadequate transparency, performance problems and redemption issues among external hedge fund managers, pension fund officials at the 367 Danish kroner ($69 billion) ATP pension plan and the €23 billion ($32 billion) Ilmarinen Mutual Pension Insurance Co. — a multiemployer pension fund — are quickly building their own hedge fund expertise.
Also, Hermes Investment Management Ltd., London, which manages the £34 billion ($52 billion) BT Pension Fund, is also preparing to launch its own hedge fund team as soon as early next year. As a result, billions of dollars in absolute-return strategies from these three funds might be shifting in-house.
Few pension funds are in a position to establish internally run hedge funds. In the U.S., for example, most funds are already resource-strapped and the trend is to outsource more — not less — of their investment portfolios, according to Benjamin F. Phillips, partner at Casey Quirk & Associates LLC, in Darien, Conn. However, some very large public pension funds may be in a position to consider moving more alternative assets in-house, including the $182.6 billion California Public Employees Retirement System, Sacramento.
CalPERS investment officials are “definitely building more internal capability to manage alternative-type strategies,” Eric Baggesen, senior investment officer for global equity, said in an e-mail response to questions. One of the potential advantages of internally managed absolute-return portfolios is that “they are far less expensive” than the external strategies, he added.
“These (pension) funds already have the in-house infrastructure and the in-house talent,” Mr. Phillips said, referring to alternative capability. “They're asking whether they can continue to bring in more talent and maybe running some of the strategies themselves ... it could be a way to keep talent and build something with applicability over time.”
The move to take hedge fund strategies in-house is not new. Investment professionals at APG, which manages the €195 billion Stichting Pensioenfonds ABP, Heerlen, Netherlands, have been developing hedge fund capabilities since 2002. APG has two teams — New Holland Capital, a hedge fund of funds based in New York, and an internal global tactical asset allocation division — that together run ABP's absolute-return portfolio, which accounted for 5% of ABP's total assets under management as of Sept. 30. Investment returns in the nine months ending the same date stood at 0.3%.
“Performance has been good compared to the rest of the industry,” said Gerlof de Vrij, head of GTAA. “One of the reasons we did relatively well is our focus on really trying to find alpha. A lot of other (hedge fund) strategies have high beta exposures. Industrywide, those that are more passively run suffered more than the dynamic strategies.”