| The search for alpha |
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| Faced with shortfalls after the longest bear market in history, pension fund managers are now considering all options in an attempt to regain the losses and return pension fund schemes back into the black. |
An increasingly popular option is to give an allocation to hedge funds, with many of the world’s largest schemes doing just that over the past number of years.
In April, the Massachusetts state pension fund gave a huge vote of confidence in pension funds, when it decided to invest $1.625 billion in five hedge fund related vehicles. The pension fund chose managers that invest in fund of funds – a fund that invests in other funds – echoing Gerry Ryan’s, head of eircom’s €3 billion pension, comments on page 1, that fund of funds are the most popular option amongst pension trustees, as they reduce the amount of due diligence required.
While Irish pension schemes have been slow to allocate to hedge funds as of yet, it seems likely that the €10 billion national pension fund will make a move on this front in September, after which time other pension funds may follow suit.
If hedge funds continue to fulfil their promise, the move towards them will be good news for pension holders.
However, with pension funds largely behind the recent flow of capital into the global hedge funds industry, which is now estimated to be worth in the region of $1 trillion, there is a concern that the market is a ‘bubble’, which may burst.
A recent study by Greenwich Associates, the financial services consulting firm, warned of the possibility of ‘overheating’ in the hedge fund market. Greenwich say that the biggest contributors to the current hedge fund boom are pension funds, and that when this flood of capital is combined with increasing leverage, declining haircut requirements and easier credit, ‘these trends bear serious consideration…as possible indicators of an ‘overheated’ market’.
New Capital Accord
The finalisation of the Basel II Accord is a welcome development for all those in the banking sector, and it puts an end to the years of uncertainty, which have dogged this project. Implementation will start at the end of 2006, but those applying the most advanced approaches will have until year-end 2007 to introduce the new capital structure.
There is a concern about the effectiveness of the new Accord, as while the EU is set to introduce a Directive compelling European banks to apply the Accord, the US authorities are expected to only make the Accord mandatory for the largest banks. |
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| Article appeared in the July 2004 issue.
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