Two of the UK's largest pension funds are reducing exposure to hedge funds to the tune of several billion.

The GBP 20bn Railways Pension Scheme and the GBP 39.6bn BT Pension Scheme both have plans to reduce their investment in the sector. The Railways Pension Scheme currently has GBP 1bn invested in hedge funds and investment director Paul Bishop said it was looking to reduce this significantly.

"We believe that hedge funds in aggregate offer a poor trade-off between expected returns and costs," he said.

The BT Pension Scheme is rumoured to be reassessing its position although a spokeswoman said there are no plans to stop investing in hedge funds completely.

The moves come just a few weeks after the California Public Employees Retirement System (CalPERS) announced it would sell its $4bn hedge fund portfolio.

Although it is unlikely the CalPERS announcement was the trigger for the move, it is further evidence of a general trend that sees pension funds moving away from hedge fund investment. Last year Santander's GBP 8bn UK pension scheme terminated its hedge funds with its head of pensions Anthony Barker saying the challenge was "paying for skill rather than luck."

Santander has not completely cut its ties with hedge funds however and this week announced a $100m commitment to Dyal Capital Partners, a Neuberger-owned fund founded in 2010 whose strategy is to buy minority stakes in hedge funds.

"We've largely divested the hedge funds we had but reinvested the capital in the equity of hedge fund managers, one of the first European pension funds to do so – following the money as it were," said Anthony Barker.

Barker said the switch in strategy – from investing in hedge funds to investing in the companies that manage hedge funds – was not necessarily aimed at reducing costs.


First published: 02.10.14

lindsay.sharman@wilmington.co.uk