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Alternative Market Briefing

Other Voices: The changing role of hedge funds in pension plan portfolios

Thursday, May 02, 2013

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Shahid Ikram
This article was authored by Shahid Ikram, CIO at Aviva Investors, a global asset manager that is part of Aviva, one of the world’s largest insurance companies, and appeared first in Swiss daily newspaper Le Temps on Monday.

Mounting pension deficits present a dilemma for trustees. New cash from plan sponsors is in short supply and projected returns from mainstream assets are unlikely to close the funding gap. We believe the answer lies not in taking more risk, but in working smarter by applying hedge funds as part of a coherent risk-budgeting framework across the entire portfolio.

***

Mounting deficits are forcing pension plans to rethink their approaches to investment and portfolio construction. The root of the problem lies in schemes’ historic over-reliance on equities, which have produced disappointing returns. These, combined with falling bond yields and rising life expectancy have exacerbated the divergence between plans’ assets and liabilities. As a result, trustees often look to asset managers for solutions that will make pension assets "work harder", often by assuming higher levels of risk. However, a pension fund that is already in deficit is likely to have a tight risk budget and can ill-afford risking precious (and potentially irreplaceable capital) in higher-risk strategies. We believe that the answer to this dilemma lies in working smarter, not harder, by developing more intelligent......................

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