Your browser is no longer supported

For the best possible experience using our website we recommend you upgrade to a newer version or another browser.

Your browser appears to have cookies disabled. For the best experience of this website, please enable cookies in your browser

We'll assume we have your consent to use cookies, for example so you won't need to log in each time you visit our site.
Learn more

Brent pension scheme drops ‘expensive’ hedge funds

  • Comment

Brent Pension Fund has dropped an “expensive” hedge fund from its portfolio in favour of a diversified growth fund (DGF).

At its last triennial valuation in April 2013, the Brent fund had assets of £554m but liabilities of £997m, meaning its funding level was just 55.6% - the lowest in the Local Government Pension Scheme.

According to its annual report for 2013-14, published this week, Brent LBC’s pension fund sub-committee has reviewed its investment portfolio since the valuation and decided to reallocate £27.3m of its portfolio from a fund of hedge funds to a DGF in order to save money.

Hedge funds often use more sophisticated and risky techniques than traditional funds, including investments in derivatives, short selling (selling borrowed shares and repurchasing them when their prices drop), and leveraging (investing with borrowed money).

DGFs attempt to achieve equity-like returns with around two-thirds of the volatility of an equity fund. They are managed more actively than a traditional balanced managed fund, which rarely changes its asset mix, but do not generally invest in the exotic assets hedge funds use.

Brent invested £40.5m in funds of hedge funds managed by Fauchier Partners as of March 2012. It cut this to £27.3m in March 2013, and has now reallocated to a DGF run by Baillie Gifford.

Shafique Choudhary (Lab), chair of the sub-committee, wrote in a foreword to the report: “During the course of the year, the fund removed its allocation to hedge funds and re-assigned the monies to lower cost and less complex alternatives to managing the fund’s assets.”

Brent had invested in a fund of hedge funds, in which put money into a fund containing more underlying funds, incurring multiple layers of fees. In July, the LGPS Shadow Scheme Advisory Board suggested that banning council schemes from using fund of fund products could save the LGPS £240m per year in management fees.

Brent’s report later explains that the fund uses passive investment management of UK equities and some overseas equities “because passive management is less expensive than active management and the extent to which active management outperforms passive management is unclear, particularly in developed markets”.

This comes amid fierce debate in the sector over the value of active investment management strategies.

A government consultation published in May on reducing cost in the LGPS suggested that council pension funds could save hundreds of millions of pounds per year by switching to passive strategies, but officers running pension funds argue this would preclude them from achieving high returns on their investments.

The government’s proposals were based on a report produced by consultancy Hymans Robertson. Senior partner Ronnie Bowie defended the report last month, insisting the report never advocated widespread and enforced use of passive strategies.

  • Comment

Have your say

You must sign in to make a comment

Please remember that the submission of any material is governed by our Terms and Conditions and by submitting material you confirm your agreement to these Terms and Conditions.

Links may be included in your comments but HTML is not permitted.