Pension funds to shift hedge fund allocations to low-volatility, low-beta strategies — report

Defined benefit plan executives in the U.S., Canada and the U.K. are likely to shift allocations within their hedge fund portfolios in response to the near-term prospect of rising interest rates, interest rate volatility and higher equity beta, said researchers from J.P. Morgan’s capital introduction division in their monthly prime brokerage report.

Pension fund chief investment officers are “likely to move away from directionally oriented hedge fund strategies and to strategies with lower correlation, less volatility and minimal beta,” said the report, which was released Wednesday.

Specifically, J.P. Morgan analysts predict that within the long/short equity strategy arena, pension fund officials will decrease allocations to directional hedge funds that have higher net long exposures and increase investment in low-beta/market-neutral equity strategies.

In the event-driven hedge fund category, directional/activist equity-focused strategies will see redemptions, while more money is rotated into low-volatility/correlation approaches, the report said.

J.P. Morgan’s report indicates that plan sponsors will hold their positions at current levels in global macro strategies, while increasing investment in both multistrategy and fixed-income relative-value hedge funds.