Brent pension scheme drops ‘expensive’ hedge funds

At its last triennial valuation in April 2013, the Brent fund had assets of £554m but liabilities of £997m, meaning its funding level was just 55.6% - the lowest in the Local Government Pension Scheme.

According to its annual report for 2013-14, published this week, Brent LBC’s pension fund sub-committee has reviewed its investment portfolio since the valuation and decided to reallocate £27.3m of its portfolio from a fund of hedge funds to a DGF in order to save money.

Hedge funds often use more sophisticated and risky techniques than traditional funds, including investments in derivatives, short selling (selling borrowed shares and repurchasing them when their prices drop), and leveraging (investing with borrowed money).

DGFs attempt to achieve equity-like returns with around two-thirds of the volatility of an equity fund. They are managed more actively than a traditional balanced managed fund, which rarely changes its asset mix, but do not generally invest in the exotic assets hedge funds use.

Brent invested £40.5m in funds of hedge funds managed by Fauchier Partners as of March 2012. It cut this to £27.3m in March 2013, and has now reallocated to a DGF run by Baillie Gifford.

Shafique Choudhary (Lab), chair of the sub-committee, wrote in a foreword to the report: “During the course of the year, the fund removed its allocation to hedge funds and re-assigned the monies to lower cost and less complex alternatives to managing the fund’s assets.”

Brent had invested in a fund of hedge funds, in which put money into a fund containing more underlying funds, incurring multiple layers of fees. In July, the LGPS Shadow Scheme Advisory Board suggested that banning council schemes from using fund of fund products could save the LGPS £240m per year in management fees.

Brent’s report later explains that the fund uses passive investment management of UK equities and some overseas equities “because passive management is less expensive than active management and the extent to which active management outperforms passive management is unclear, particularly in developed markets”.

This comes amid fierce debate in the sector over the value of active investment management strategies.

A government consultation published in May on reducing cost in the LGPS suggested that council pension funds could save hundreds of millions of pounds per year by switching to passive strategies, but officers running pension funds argue this would preclude them from achieving high returns on their investments.

The government’s proposals were based on a report produced by consultancy Hymans Robertson. Senior partner Ronnie Bowie defended the report last month, insisting the report never advocated widespread and enforced use of passive strategies.