The £4 billion Cheshire Pension Fund has approximately £545 million invested in hedge fund strategies which makes this local authority pension fund’s strategy unique among its peers, Modern Investor can reveal.
The £545 million exposure makes the scheme by far the most heavily invested among UK local authorities in this asset class, according to Citywire’s Global WOW (Who Owns What) database, which has uniquely gathered and analysed the fund portfolios of 95 UK local authorities over the 2014/2015 financial year.
Modern Investor’s Global WOW analysis revealed a total of 26 authorities had an exposure to hedge funds while 38 steered clear of the asset class completely.
Speaking to Modern Investor, Steve Tranter, finance manager and investments chief at the Cheshire Pension Fund said he was satisfied with the scheme's contrarian asset allocation.
'The hedge fund portfolio has performed well on a net of fees basis, and in both return and risk terms has compared favourably to many of the alternative options available.'
‘For example, the aggregate portfolio has outperformed, in both risk and return terms, the average diversified growth fund manager, which we note are more common place in the LGPS.’
In the financial year ending 31 March 2015, the net value of the fund’s total assets rose by almost 14%, from £3.6bn to £4.1bn, as stated in the Fund's financial report.
Hedge fund net assets increased meanwhile by 11%.
The increases, it noted, reflected both the general rise in markets as well as ‘the pro-active management of fund assets.’
Tranter sees transparency, cost and performance as some of the key risks of investing in hedge funds, therefore a sharp focus is applied in these areas.
‘In order to ensure the Fund was comfortable with the active management risks associated with hedge funds, significant due diligence was carried out on each of the hedge fund managers prior to selection and the costs and performance remain closely monitored.’
Nevertheless, according the December report of the Centre for Policy Studies, Cheshire had the highest fund management costs, per member, of all LGPS in the 2014-15 financial year. At £506.2 it was the only fund which broke the £500 threshold (page five of report).
However, Tranter said that the investment, which is approximately 15% of the pension fund’s portfolio, was a key component of the fund’s growth portfolio and was set up primarily to reduce the fund’s exposure to equity risk, without hurting Cheshire’s returns.
‘The rationale for investing in the hedge fund mandates in 2011 was to mitigate the significant equity risk that was inherent in the previous strategy; whilst noting that in order to achieve equity-like returns over the longer term other risks would need to be taken.’
Cheshire is invested in just four hedge funds, this is significantly less than some other LGPS: Hampshire is the record-holder with allocations spread between 24 hedge funds, followed by Lancashire (16) and Berkshire (15). An average LGPS exposed to hedge funds has invested in over five managers of the strategy.
But Cheshire said that each of the four managers – including Permal – Jubilee Absolute Return fund, Arrowgrass International fund, Winton Futures fund, as well as Och Ziff Overseas II fund – had a complementary role within the strategy, and this combination was a result of detailed work on portfolio construction.