Nobody wins this year. Watson Wyatt declined to identify those fund managers providing the best results for Hong Kong's pension fund trustees -- although it did identify two who came close.

Every year Watson Wyatt organises a seminar in Hong Kong to look at the results of its Manager Investment Performance survey, which is geared to the territory's fund managers and trustees of pension plans, including defined benefit, MPF and MPF-exempt defined contribution.

It invariably attracts the bulk of Hong Kong's traditional asset management scene, and gives the consultancy a chance to forward its views on themes such as fund governance and manager selection. Given Watson Wyatt's prominence in the local pensions industry, these annual seminars set a philosophical tone for the industry -- and also boost those fund houses whose risk-adjusted returns have outperformed their peers.

This year, however, Watson Wyatt's consultants acknowledged the scale of market dislocation has made it difficult to know whether fund managers are underperforming because of lack of skill, or because of poor timing, or organisational problems, or sheer bad luck.

Getting this judgment right means a huge difference to plan sponsors, the majority of which have rapidly seen pension surpluses turn to deficits.

The median institutional manager in Hong Kong lost 31.5% in 2008, the largest single-year loss since Watson Wyatt began its surveys in 1983. Schemes that contained 80% or more of equities exposure lost 42.5%, but the median scheme with equity exposure below 40% lost only 7.8%.

Over a five-year period, the median fund returned a slightly positive number, but the degree of risk varied widely. In other words, adding lots of risk to the portfolio has not significantly added returns. No fund house running DB mandates achieved sustainable outperformance with low risk, although RCM and Schroders came closest, according to one slide in a presentation by consultant Philip Tso. Performance in MPF was similar -- but comes with higher administration and trustee fees.

This means the majority of pension funds are now underfunded, by around 85% on average. They will have to increase their contribution rates, which is a burden in good times, let alone during a recession.

Plan sponsors therefore need to take another look at risk budgets, risk management, plan structure, and what they're paying for alpha and beta strategies.

In particular, plans need to become better not only at measuring risk, but at managing risk -- which means asking a lot of counterfactual questions, ie "what ifs", says consultant Janet Li. She ran through events over the past 18 months from the viewpoint of "Hindsight Harry" to point out the many red flags that told investors to get out of risk assets -- and were largely ignored.

"We didn't understand risk well enough," she says. Plan sponsors should consider using surpluses to buy insurance or plan contingency funds, rather than take pension holidays or cut contributions; they should also improve asset diversification. Investment strategies often need to be made more simple (and more passive) or, for plan sponsors with the resources, to be better managed.

Consultant Mark Brugner advises plan sponsors cannot judge their external managers simply on the numbers: everyone's had a dreadful year. But they do need to consider other factors when they think about retaining managers. To what extent has downsizing of revenues or loss of clients impacted the manager's stability and commitment to its investment process? Are the managers who did well over recent years still good value? Are trustees sufficiently diversified among counterparties? And are they getting a reasonable deal on fees?

Craig Mercer picked up the issue of fees for hedge funds. He says the old 2-and-20 structure is unsustainable and predicts fees will come down. He also suggests that performance fees based simply on absolute performance don't make sense; better are fees benchmarked against Libor and a Libor-based hurdle rate; better still, a Libor benchmark with a three-year rolling lock (for a reduced annual management fee).

He urges plan sponsors to be more aggressive with regard to negotiating fee schedules. The painful experience over gating of hedge fund assets and re-hypothocation of assets held with prime brokers has also taught plan sponsors the need to look at counterparty risks and funds' valuation procedures for illiquid assets.

Mercer also says Watson Wyatt has been promoting direct investment in hedge funds; funds of hedge funds are useful for niche exposures but make a poor substitute for a general allocation to alternative assets.