Does your pension fund use private equity & hedge funds?

grey_gym_sock

it's not entirely helpful that the article discusses hedge funds and private equity together. the arguments about them are not the same. ("absolute return" usually means something simliar to hedge funds, not to private equity.)

private equity - investing in businesses which you can't access via companies quoted on the stock market - has some logic to it. if you ignore it completely, you're ignoring a large part of the real economy. investment costs are going to be higher than for quoted companies, but that's to be expected - it's not simply a rip-off.

hedge funds or absolute return funds have no such logic behind them. they use a mixture of assets classes (which could be achieved through other means), and then let the manager make some bets, and levy high charges whether or not the bets come off.

there's no common investment strategy to theses funds. there's never a reason to invest in them as a class. there would be a reason to invest in 1 if you knew the manager can produce outstanding returns. but high past returns are likely to be due to luck - when a lot of managers are placing big bets, some of them will win big and hence look clever.

Thrugelmir

cepheus wrote: »

as explained in the link, it is mainly because of the higher fees they pass onto managers,

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I'm concerned with the return than fees. Returns on early stage company investments are far better than those in mature ones.

cepheus

bowlhead99 wrote: »

There are a variety of fees charged to and through different entities. But the investors know what they are and what they will accept and they put together side-letters and carve-outs for whatever terms they need before they invest.

These are typically closed-ended funds (the opposite of a unit trust or OEIC with transient investors) and a fund can take a year to reach its final close getting sufficient investors happy to be on board to be able to execute its investment strategy. There is no way you are telling me there are a significant number of institutional investors writing subscription agreements for $1m to $200m commitment to a fund relationship, without knowing exactly what the fee structure means and how costs and incomes (inside or outside the fund) are shared between investors, the manager and the portfolio companies they acquire.

I think the article was highlighting that the public rarely understand what goes on inside their pension because these decisions are made for them. Perhaps pension providers should have to display the costs of all the investments so they can judge if they are getting value for money. Surely that isn't unreasonable?

IronWolf

The costs are high but that doesn't mean all hedge funds are bad. Not all operate the 2 and 20 fees, some even set a hurdle. And some with high fees still generate great returns if the manager is competent.

cepheus

There is an absolute return Index. I have generated it here from sharescope, alongside its inflation adjusted return (blue) and the total (unadjusted) return of the FTSE 100 total return (brown). The absolute return index only goes back to 2005.

Ark_Welder

What the graph demonstrates is the main purpose of an absolute return and/or capital preservation strategy: reducing the likelihood of a a major loss just before a sale. Something that a pension investor with a fixed deadline fast approaching might appreciate, or a cautious investor that finds it hard to stomach the higher volatility of a pure equity strategy.

Absolute return and hedge funds shouldn't be confused with one another, though. Whilst there might be an overlap, some absolute return strategies are based upon asset allocation between the mainstream asset classes with little or no use of derivatives. This is (or has been) one of the main problems with the AR sector of the open-ended funds - it covers a wide range of different methods of - supposedly - achieving its aims. There are funds in that sector which could quite happily sit in another because their strategy relies more on asset allocation and less on derivatives. And I would argue that a capital preservation mandate is an absolute return strategy, so this could include the likes of of the Trojan Fund. So before haranguing the Trustee's, I would try to find out which funds were being used for to achieve the AR.

For consistency, the graph ought to show the inflation-adjusted return of the FTSE to show that like-for-like comparison .

cepheus

Ark_Welder wrote: »

For consistency, the graph ought to show the inflation-adjusted return of the FTSE to show that like-for-like comparison .

Yes I know, unfortunately it doesn't do two inflation adjustments on the same graph and I spent ages producing that! You can however compare the two non inflation adjusted graphs with one another to get an idea of relative performance. That said, FTSE100 isn't an holy grail, in fact it under-performs second line stocks and many foreign indices

Perhaps absolute returns suit me personally after all since I've only got a decade before drawing the pension, and they seem to hedge against a market crash. However, I would not be too pleased if I was in this pension scheme as a new recruit who don't get defined benefits and are reliant on significant growth to obtain a half decent return!

bowlhead99

cepheus wrote: »

There is an absolute return Index. I have generated it here from sharescope, alongside its inflation adjusted return (blue) and the total (unadjusted) return of the FTSE 100 total return (brown). The absolute return index only goes back to 2005.

So basically over the 8.5 year period to 30 June, absolute return funds delivered just over 60% while FTSE 100 delivered just over 70% with a massive amount of extra volatility.

The IMA absolute return sector average will be what was delivered to investors, net of fees, while FTSE is the raw return and if you were in an Index tracker, depending on your manager, you might lose half a percent annually, compounded, due to manager fees. Admittedly, UK tracker fees have fallen a little these days if you shop around, you can probably get it down to a quarter percent p.a. but many do not.

So basically what your graph shows is that over the period, the AR funds after their terrible hidden fees delivered "about the same" as FTSE 100 with a fraction of the volatility. No 40% losses from buying at the wrong time.

That is one hell of a good advertisement for the sector and while past performance is no guarantee (and we all know recent economic conditions are not typical of the last 50 years), it doesn't in any way indicate that you should be scared of having exposure to an AR fund. You have got a net annualised result of inflation plus 3% with low volatility in up and down markets. FTSE delivered marginally more at a potentially very painful level of volatility.

If you consider what you're graphing here, it's the absolute return sector investment manager average, accessible to you and I through mainstream retail funds in our SIPP or personal pension, and is not really the world of private hedge funds in which large institutional investors are active, and in which a defined benefit pension fund might invest a portion of their pot. Those private funds, together with private equity, are the subject of the attacks in the article. But if those nasty "hedgies" get their investors the sort of net returns on your graph, they will probably find investors coming back for more.

Of course, if you are lucky enough to be in a defined benefit scheme, the level of fees it pays is rather less of an issue as the benefits are already defined for you and most such schemes do not go bust.

IronWolf

That graph looks like the absolute return funds are doing a pretty good job imo

grey_gym_sock

well, the graph illustrates that you can smooth returns by going for a mixture of assets classes instead of 100% equities, in exchange for accepting somewhat lower returns overall. in the given time period, it's only very slightly lower returns - but that may be because bonds (the most widely used "smoothing" asset class) have done unusually well in the period. in general, 1 might expect the difference in returns to be greater.

a mix of asset classes usually makes sense. if that's all "absolute return" or "hedge fund" means, it's fine. if it also means excessively high charges, dangerously high gearing, dangerous use of derivatives, and an unexplained "black box" strategy, then it's not so fine.

AIUI, any hedge fund is likely to include at least some of those undesirable features. there may be more chance that an "absolute return" fund doesn't. it could just be a boring "balanced" fund, but using the more fashionable "absolute return" tag.

if you're in a DB scheme, i wouldn't entirely dismiss the possibility of it (and the sponsoring company) running into difficulties later on. not if you're a few decades away from drawing the pension. things can change. though you do still have an extra layer of protection compared to a DC scheme.