Pension funds must not make the mistake of seeing hedge funds as an asset class but should instead look at them as a tool to "diversify and protect against volatility", says Keith Guthrie, chief investment officer at consultancy Cardano.

Speaking at a press briefing last week in London, Guthrie explained that expectations of what hedge funds can bring to a portfolio are often wrong and that "there often is a correlation" with other investments made by pension schemes.

Guthrie stressed that hedge funds were not a means of securing absolute return, but that in volatile market conditions they could help investors limit losses.

"People should remember, there is a substantial risk. But hedge funds could contain the losses. And if you have smaller losses during economical difficult times this will make it easier to get back up. They [hedge funds] made losses, but smaller losses than in equity markets. It is important that everybody is clear on expectations."

Currently hedge funds around the world hold roughly $2tn worth of assets and Cardano says they are "back at the top of their game" after a downfall following the 2007/2008 crisis. However, UK pension funds have an average allocation of only 5%.

The way forward for pension funds is, according to Cardano, to invest within the macro space, where "you can get real diversification into pension funds."

The risk manager conceded that high fees had been a barrier to further investment with hedge fudges over the past couple of years but claimed the fees were fair.

"If you want real Alpha you have to be prepared to pay for it," Guthrie said.

14.11.2011

azeevalkink@wilmington.co.uk