Hedge Funds: a growing asset class?

Date: Thursday, February 15, 2007
Author: Brooke Smith, Benefits Canada

Hedge funds are still an alternative asset class for the majority of institutional investors, said Pawel Piesowicz, a consultant with Mercer Investment Consulting in Toronto, speaking at the Alternative Investments & Absolute Return Strategies for Institutional Investors conference.

But according to a 2006 Mercer survey on funds of hedge funds, Piesowicz says interest in this asset class is growing. Globally, institutional investors are increasing their use of fund of hedge funds, he says. In fact, 52% of those surveyed either invest in or plan to invest in funds of hedge funds. Japan has the highest use (44%), and Australia has the highest projected use (23%). Canada, however, has the lowest use at 21%.

But perhaps Canada’s use can increase if revisions to hedge fund investing are made. According to the survey, four areas need to be improved: high fees, slow reporting, reporting format and transparency, and explanation of the fund’s performance. “If plan sponsors lack the understanding of the strategy, then they’re more likely to be dissatisfied,” says Piesowicz.

Even non-hedge fund investors have concerns. According to the survey, high fees, good governance, and lack of transparency and reporting were the top three barriers to investing at 60%, 57% and 49% respectively.

Despite low Canadian usage, the Ontario Teachers’ Pension Plan (OTPP), which began investing in this asset class in 1996, currently has a global portfolio with 150 hedge funds, making up about 7% of its portfolio. Associate portfolio manager Brandon Gill New says OTPP’s reasons were twofold: diversification and alpha generation.

However, despite alpha returns, Gill New cautions that investors do need good due diligence. “Fifty to 60% of the businesses wind down because of operational reasons or fraud.”