Pension funds are missing out on alternative growth opportunities by avoiding hedge funds, according...
Pension funds are missing out on alternative growth opportunities by avoiding hedge funds, according to Kanesh Lakhani, a director at State Street Global Advisors.
Lakhani said the mention of the words "hedge funds" often conjured up images of financial speculation and recklessness as a result of high-profile protagonists such as George Soros and Julian Robertson.
In a recent Phillips & Drew survey of pension investment managers, none of those questioned use hedge funds as an investment vehicle although 36% said they would consider their use. However, some 64% said they would not use hedge funds as an alternative investment.
Lakhani said: "Hedge funds have a very low correlation to traditional asset classes such as UK and overseas equities and bonds. They have the ability to overcome shortcomings in conventional portfolio construction such as by generating positive returns even in falling or flat market conditions.
"Funds like those of Soros were highly leveraged and sought very high returns. When they hit rough waters, they hit the headlines."
Lakhani said the term hedge fund was generic, covering some 3,000 specialist funds and added there were serious shortcomings in a long-only conventional portfolio construction process that severely restricted the ability to add value.
Lakhani explained that hedge funds could also have a long/short composition which made them more cautious. Managers of long/short portfolios additionally focus on identifying stocks that are likely to go down. This balancing of exposure has a neutralising effect on the fund, he said.
In addition, hedge fund managers are not restrained by sector weightings and Lakhani said he believed most managers would admit they were better in some sectors than others if pressed.
"In a long-only portfolio a manager will generally hold all sectors, if only for risk control reasons. In long/short a manager can avoid sectors in which he has no skill or in which there is little return opportunity," he said. He added that many active managers were becoming slaves to the index.
He said: "Consider a typical UK equity manager for a moment. Given the weighting of stocks such as Vodafone the manager will invariably hold a position in the company even if he does not have a view on the stock or worse still if he actively dislikes it."
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