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Superannuations Increasingly Investing Directly Into Hedge Funds

Posted: 07 Sep 2011

Although Australian institutional investors are moving into direct hedge fund investments, it is at a slower and lower level than other international counterparts, a situation that is influenced by the role that investment consultants play in recommendations, says John Gregory, head of capital introductions and head of Citi Prime Finance in Australia.

Hedge fund allocations still represent a relatively small slice of the overall AU$1.3 trillion superannuation industry – no more than 3-5% of total allocations, Gregory says.

Gregory’s observations dovetail with Citi Prime Finance’s recent report, “Global Pension and Sovereign Wealth Fund Investment in Hedge Funds: The Growth and Impact of Direct Investing,” which found that Australian and Japanese institutional investors were more likely to use consultants to investigate hedge fund investments, rather than working with prime brokers with capital introduction briefs. This has held true since the 1990s, the report said.

“As the industry grew rapidly in the late 1990s and early 2000s, investors had two main choices when considering a hedge fund investment – invest directly into a commingled fund structure, or invest with more of an arm’s-length approach via a fund of funds, where a third-party manager selected the underlying hedge fund managers for inclusion in the portfolio,” the report said. “For the most part, institutional investors who were exploring the world of hedge fund investing followed the fund-of-fund investment path as they offered a perceived easier route to the market – although there are undoubtedly regional variations, such as the heavier reliance on consultants by Japan’s pension fund industry and Australia’s superannuation funds.”

But more funds are considering directly investing in hedge funds rather than taking the fund of hedge funds route because of the higher fees and a perceived lack of transparency with funds of hedge funds, and the increased liquidity in terms of redemptions with direct hedge fund investments, Gregory says.

“Investors have gotten out of [funds of funds] and are looking at direct investments,” Gregory says. “Now the thinking is, OK, maybe if we take the time, we can create a fund of fund type of exposure if we go with a multi-strategy fund or a global macro fund. You can go direct, do your own due diligence, and know full well what you’re invested in. The key factors when evaluating a hedge fund remains alpha generation, alignment of interests, transparency, operational infrastructure, independent oversight, liquidity and fees."

Gregory notes that while remaining the largest investment strategy pool, equity long/short funds were losing market share to multi-strategy, event-driven and global macro funds, and that CTAs were generating interest.

Where funds are investing directly in hedge funds, they are taking the time to build appropriate internal systems to monitor their investments, Gregory adds.

“The funds that are taking ownership are building intellectual property by attracting people and implementing internal systems so they can properly monitor their investments,” he says. “The most important system would be a risk system – a way to aggregate what the hedge fund exposure represents. That drives an opportunity for me to go in and provide solutions across the many products that Citi offers.”

(RA)

If you have any comments about this story or news tips, contact Christopher Gohlke in New York at cgohlke@globalcustodian.com or Janet Du Chenne in London at jduchenne@globalcustodian.com.