ATP Seeks “All Weather Portfolio”; Separate Accounts Gain in Popularity; Pensions Tell Hedgies to Cut Fees

While Denmark's pension fund ATP will up its investment in hedge funds, pension funds are hoping to negotiate lower fees with reluctant fund managers this year.

(February 9, 2010) – Large funds are still looking to up their investments in hedge funds in a search for the illiquidity premium, trading off the ability to sell assets quickly for added return. They’re also pushing fees down as it becomes clear that asset owners – not financial intermediaries – have the power now.

In recent news, pension fund ATP, which manages 609 billion Danish crowns ($112 billion), is planning to invest 1 billion crowns annually in hedge funds, also doubling its exposure to private equity.

According to Reuters, the scheme is striving to achieve an “all weather portfolio” by implementing a long-term strategy that will obtain returns independent from market conditions.

“We are looking for people with a record or people we can believe in: good ideas, good execution, good risk management,” CEO Lars Rohde told Reuters, adding that the fund would only invest in hedge funds with high standards of transparency and accountability.

“We have always been a 100% believer in transparency,” Rohde told ai5000 in September. “We’re very into exchanging ideas because I think, at the end of the day, we will be a better organization by giving other people access to what we’re doing and to comment on the way we are doing our business.”

Currently, ATP has about 5% of its assets in private equity, a percentage expected to increase to 10%. The pension invests in hedge fund strategies through its internal alpha team, which has 5 billion crowns ($918.3 million) in assets to invest. Rohde said ATP has been investing less than 1% of its assets in emerging market equity. Additionally, ATP plans to diversify its real estate portfolio by adding timber investments, according to Reuters.

Separately, according to new research from data firm Preqin, the number of institutions investing in hedge funds through separate or managed accounts could more than double in 2010. Of the 60 institutional investors surveyed in January, 16% said they already invest in hedge fund separate accounts, which are privately managed and use pooled money to buy individual assets. Another 23% say they are considering making their first separate account investment in 2010. Additionally, the research revealed U.S. institutions are less involved with managed accounts compared to European institutions. Nineteen percent of European institutions surveyed said they already invest in separate accounts, compared with 12% for U.S. pension funds, endowments and foundations, Pensions & Investments reported.

Another recent survey, led by bFinance, showed that hedge funds will likely be reluctant to offer reductions to pension funds, with 88% of hedge funds saying they won’t cut charges. After securing management and performance fee cuts in 2009 following the financial crisis, when hedge funds were struggling to attract investors, pension funds have demanded that hedge funds drop their fees.

According to Olivier Cassin, bfinance managing director of research and development, investors are still willing to pay performance fees to reward long-term skill. Yet, they’re no longer willing to pay active fees for beta or for ‘luck’.

The UK’s largest pension fund with £21bn under management, Hermes Fund Managers, recently announced the extension of its performance fee clawback provision to all of its products, aiming to attract about £15 billion from third parties over the next five years. The decision is the first time such a clawback system has been proposed to all of Hermes’ funds.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742