This $30 Billion Pension Pot Is Backing Hedge Funds

  • Alternative assets can provide a higher return over time: PPF
  • Hedge funds are part of firm’s alternative-investment strategy

The firm that compensates members of U.K. retirement pots when they run into trouble is keeping faith with hedge funds despite widespread criticism of their high fees and underwhelming returns.

The Pension Protection Fund has about 23 billion pounds ($30 billion) under management and a 4.1 billion-pound surplus, thanks in part to investing in assets other than stocks and bonds, according to Ian Scott, its head of investment strategy.

Ian Scott

Source: PPF

So-called alternative assets account for a fifth of the PPF’s investments, a proportion that has increased over the fund’s 12-year lifetime, Scott said in an interview. These assets include infrastructure and private equity as well as hedge-fund investments, he said, declining to be more specific about the allocation.

“Part of the alternative portfolio is invested in a portfolio of hedge funds,” Scott said, adding that he intends to continue this strategy. “There are characteristics there that have been helpful over time.”

The vote of confidence in hedge funds comes at a challenging time for the $3 trillion industry. While the funds are now starting to attract money again, clients withdrew $70 billion last year, the most since 2009, according to Hedge Fund Research Inc.

California Pension

That was hardly an anomaly, with one of the biggest U.S. state funds -- the California pension fund known as Calpers -- planning to dump hedge funds as far back as 2014. And Warren Buffett said in his annual letter to Berkshire Hathaway Inc. shareholders last year that investors wasted more than $100 billion on high-fee money managers in the past decade.

The London-based PPF, which has about 250,000 members, has increased its allocation to alternative assets from 18.7 percent in 2015 as it seeks to make enough money to cover claims and reduce its reliance on fees. Alternative investments offer higher returns in exchange for what’s often a long-term commitment to illiquid assets. Some can make money in falling markets.

The PPF aims to generate an annual return of 1.8 percent over its liabilities. Pension deficits among FTSE-350 companies reached the highest ever last year as record-low bond rates in the wake of the Brexit vote reduced investment returns.

Pension funds across the world are seeking ways to boost yields in an era of cheap money. Royal Mail Plc this month became the latest British company to announce plans to scrap its defined-benefit pension scheme, following in the footsteps of Tesco Plc.

“Our strategy is designed to match the liabilities and provide some outperformance that will contribute to the long-term sustainability of the fund,” Scott said. “By allocating to these alternative assets, we think we can, over time, generate a higher return than we would otherwise.”

(Corrects attribution in first deck headline.)
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