Australia’s superannuation funds such as HostPlus and Rest Super are looking at raising their allocations to hedge funds, despite their long-standing aversion to the level of fees charged*.
HostPlus, a A$15 billion fund for the hospitality sector, plans to increase the number of hedge funds in its portfolio with the aim of dampening volatility and reducing correlation risk.
Its alternatives allocation includes hedge funds and credit, but not property and infrastructure, and forms 8% of the total portfolio. But the exposure is credit-heavy, and the fund wants to change that.
HostPlus’s exposure to hedge funds has remained minimal for various reasons. It has a A$240 million investment in Boston-based multi-strategy manager GMO and A$130 million in Connecticut-based Bridgewater Associates – positions it has held since 2000.
The challenge is to find managers that are uber-transparent and willing to cut a deal on fees, noted Sam Sicilia, chief investment officer at HostPlus.
“We go in with a very clear idea of what we want to pay for a certain strategy, and the average is around 90 basis points. If they refuse to negotiate, I have to go to my board and justify why these people are so special that I am willing to pay away members’ money.”
Another pension looking to boost its hedge fund exposure is Rest Super. The retail employees’ retirement fund has two allocations to multi-strategy managers – GMO and UK-based fund-of-funds firm Permal – representing about 5% of the $30 billion fund. Jo Townsend, CIO at Rest, says she is ready to expand this line-up.
“We want funds that can deliver an investment objective of cash plus 3-5% with downside protection against equity risk,” she said. “We are also very vocal about transparency and getting information from our managers about their underlying exposures.”
Asked about fees, Townsend said that is just one of many considerations. And negotiating lower fees isn’t always possible, she noted, especially when a manager has a good track record and is effectively closed.
Rest has appointed asset consultant Jana to make recommendations on funds and pays Mercer Sentinel to run operational and execution checks. “We are interested in how funds are set up and what risk management systems they have in place,” added Townsend.
Interestingly, one of the biggest institutional investors in Australia – the government’s A$98 billion Future Fund – invests heavily in hedge funds, but has been reducing that exposure. As of March 31, 13.6% of the portfolio was in hedge strategies, with a value of A$13.29 billion, which has dropped from 16.6% as of June last year. This is “in line with our overall view of the opportunities and the development of the portfolio,” noted a spokesman.
As for the level of fees, he said the Future Fund maintains careful oversight of costs and works hard to negotiate value for money arrangements that are competitive.
Sicilia believes the common hesitation in Australia about investing in hedge funds lies in the often-empty promise of absolute returns.
“When hedge funds got whacked in 2001 after the dotcom bubble burst and then again in 2008 during the global financial crisis, we all stood back and took a long hard look at what they can really offer,” he said. “Super fund boards don’t necessarily want to deal with the complexity of highly engineered instruments and would often rather buy a product they understand.”
Ultimately, hedge fund managers have a tendency to overplay their skill, argued Sicilia. “Fees are systemically high and for no real reason. It’s a nonsense to say hedge fund managers won’t work for lower fees. What else are they going to do? Run a fruit shop?”
*The full article on this topic in the latest (July) issue of AsianInvestor magazine.