November 5, 2013
By Mark Cobley
The figures come from the annual “Purple Book” survey run by the UK government’s Pension Protection Fund agency, which tracks the finances of the UK’s £1.1 trillion worth of corporate pension funds.
According to the agency’s figures, the average allocation to hedge funds rose from 4.5% of total assets worth £1 trillion, as of March 31 2012, to 5.2% of total assets worth £1.1 trillion, as of March 31 2013.
The report doesn’t track flows or new investments; just a “snapshot” of the total amount invested at those dates. Its figures suggest the amount invested in hedge funds rose from £46.2 billion to £58.2 billion during the 12 months. [EXPAND Read more]
The report does not include information on how much of that was due to the value of existing investments increasing, and how much was due to fresh investment.
Bernard Nelson, a senior investment consultant at Buck Global Investment Advisers, said many of his clients had increased exposures to Diversified Growth funds, products offered by mainstream asset managers which allocate money to hedge funds in turn, among other assets.
He said this was a possible reason for the increase in hedge-fund allocations, though it was not clear from the PPF figures.
Nelson said: “Only the largest pension schemes tend to allocate money to hedge funds directly. The smaller and medium-sized schemes, which is our client base, allocate through [diversified growth funds] and there has certainly been a big increase in interest in those in recent years.”
The PPF said the figures showed “pension schemes are continuing to reduce their risks as most of the asset allocation trends seen in recent years remain unchanged. [These] include a move away from equities into bonds, hedge funds and cash and deposits.”
The schemes’ average equity allocation dropped from 38.5% of assets in March 2012, to 35.1% in March 2013. Because of the overall rise in asset value, however, the value of equity investments implied by those percentage figures held more-or-less steady, falling from £395 billion to £393 billion.
Allocations to UK gilts and other fixed-income assets, however, jumped from 43.2% to 44.8%, or £444 billion to £501 billion.
Within that, the PPF said that schemes have a weighted-average allocation of 18.3%, or £205 billion, invested in “index linked securities”. This is likely to consist overwhelmingly of index-linked gilts issued by the UK government, according to a PPF spokesman.
This implies UK pension funds control about two-thirds of this market. According to the latest figures from the UK’s Debt Management Office, the government has £301.5 billion of index-linked gilts outstanding.
Nelson said: “This could be due to the increase in liability hedging strategies in general. These usually invest either in inflation swaps, or in the physical index-linked gilts.
“In the past few years there has been a higher yield available on gilts than on swaps, and the syndications [sales] of index-linked gilts by the government have gone well. Pension funds are natural buyers of these.”
The PPF’s Purple Book tracks data from 6,150 UK schemes, all of which are defined-benefit or final-salary type arrangements. They are mostly shut to new staff, with only 14% still accepting new joiners. The data does not include new-style defined-contribution plans. [/EXPAND]