Hong Kong pension plans review alternatives

Plan sponsors weigh up the advantages of adding hedge funds and private equity to their portfolios to compensate for poor performance in traditional assets.

At a meeting of the Hong Kong Retirement Schemes Association (HKRSA) last week, plan sponsors listened intently to advice on how to achieve positive performance in negative markets by increasing their exposure to alternative investments.

While it may take some time for plan sponsors in Hong Kong to fully embrace these absolute return strategies, organizers of the event said the feedback was positive and that trustees are beginning to see the value in alternatives. Corporate pensions plans attending the gathering included Jardines, Swire Group and Shui On. Representatives from Caritas' pension plan also showed up.

Addressing the meeting, Paul Smith, head of global fund services at Bank of Bermuda, spoke about investing in hedge funds, private equity vehicles and property as a protection against a worldwide decline in equity and bond markets. "The recent shift away from defined benefit to defined contribution schemes in Hong Kong makes 2001 a good year to start considering these sort of assets," says Smith. "Distressed employees who have lost 30% of their savings this year by sticking with traditional investments are now looking for ways to protect their downside in a poor market and possibly make a return."

Global hedge funds have managed to escape a lot of the blood letting that has occurred in traditional markets this year. The release of September figures by US-based hedge fund tracker TASS/Tremont this week showed hedge fund performance was up 2% for the year to date. "This is a relative out performance of 20% on the MSCI Index," says Smith.

When plan sponsors do take the alternative plunge it is unlikely they will choose property above other assets, despite the city's long history with property investment. This is due to the absence of real estate trusts, says Smith. "In the US, pension plans invest in liquid vehicles known as real estate investment trusts. These don't exist in Hong Kong, so unless investors are willing to buy physical property their only option is to invest by proxy through various real estate companies listed on the stock exchange. And this cannot really be classified as alternative investing."

The Hong Kong Hospital Authority is the only local pension plan known to have dabbled in alternatives, having bought some private equity assets.

The take up of alternatives by pension funds will need to be driven by the consultants such as Watson Wyatt, WM Mercer and Towers Perrin. To date, these consultants have done little to promote the market, partly because their clients have not forced them to and partly because it would require a lot of extra research to get up to speed on the industry.

Smith plans to address the HKRSA again in April next year.