Asian public pensions still averse to hedge funds

The Hong Kong Hospital Authority's provident fund is a rare beast. It is among only 2% of Asian public pension funds that invest in hedge funds, according to US research firm Preqin.

The HKHA currently allocates 2%, or $70 million, of its $3.5 billion in AUM to the asset class, says a new Preqin report. That figure is usually 5%, but the institution has just divested a fund-of-hedge-funds manager and is in the process of hiring another. 

By contrast, 70% of public retirement funds in North America and 27% in Europe allocate to the asset class. On average, public pensions in those regions have between seven and 12 hedge-fund investments in their portfolio.

That said, there does seem to be a growing inclination among Asian pension schemes – notably Korean funds, such as the National Pension Service and Government Employees Pension Service – to boost exposure to alternatives.

But it may be a while before they achieve the kind of allocations seen in the West. For example, Canada's Teachers’ Pension Plan allocates 11% of its $110 billion to hedge funds, the figure for the $7.8 billion Missouri State Employees' Retirement System is 25%, and Sweden's Svensk Handel Försäkringar allocates a fifth of its $791 million to these investments.

Asia also lags other regions as a destination where pension funds want to put their money. It was named by Preqin respondents as a preferred region in which to make hedge-fund investments by 9% of public pensions, after North America (63%), global (60%) and Europe (27%).

Globally, funds of hedge funds (FoHFs) – long the preferred vehicle for pension investments into the asset class worldwide – retained their dominance, with 79% of public retirement funds allocating to them. Other popular strategies were macro (33%), long/short equity (31%), managed futures (29%) and commodities (29%).

Katherine Johnson, senior research analyst at Preqin, says 57% of public pension funds plan to seek out new FoHF vehicles as part of their portfolio expansion over the next 12 months, compared to 67% of private-sector pensions. She also notes that, despite the staying power of FoHFs, public pensions “are looking to invest directly” as well.

The public pensions sector has been steadily increasing allocations to hedge-fund strategies over the past five years, due to the diversification benefits they offer, says Johnson. Public pensions have a mean exposure of 6.6% to the asset class, up from 3.6% in 2007.