A combination of circumstances has led to the increased take-up from pension schemes which are again seeing hedge funds as a means both to drive returns and to strengthen the resilience of their portfolios. With the improvements in funding levels over the last 18 months, an increased focus on their endgame - including planning for a buyout or for running-on - is prompting many schemes to look at shorter-term investment horizons.
Guy Saintfiet, partner and head of EMEA fund management at Aon, said: “The current economic backdrop and the changing investment needs of UK pension schemes has led to many reviewing their portfolios. Unlike the defined contribution scheme sector, where there is an increased emphasis on illiquid investments, the shorter-term investment horizons of DB schemes - prompted by thoughts of moving to a risk settlement solution or plans to run-on - have made illiquids less of an option and reopened greater interest in more agile hedge fund investment.
“For example, during the past 12 months, Aon’s own hedge fund solution has seen a significant increase in new mandates and a rise in assets under management of over a third. The solution was designed to deliver steady absolute returns, diversification versus equities and credit, as well as downside protection, and it has enjoyed a strong track record across different market conditions. It’s offering what schemes need as they assess both their own funding and their future. Schemes are obviously seeking hedge fund solutions that give strong investment results but there is also a heightened emphasis on liquidity, cost and ESG integration that is in line with the governance needs of institutional allocators. Funds that offer that combination are increasingly attractive.”
Tim Banks, partner in Aon’s UK Investment practice, said: “Different economic times demand different investment approaches, and hedge funds are currently offering an opportunity that pension schemes need. But that need is not restricted to just pensions - we have also seen increased uptake from other investment clients such as endowments and foundations. Unlike many DB schemes, they do have a longer investment horizon but given the wider market volatility, they are choosing to use hedge funds tactically and as a place to park cash for commitments made to illiquid investments.”
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