Diageo Pension Scheme has reduced its exposure to equity-based hedge funds and increased allocation to other hedge fund strategies alongside its overall derisking framework.
Schemes seeking greater diversification in their portfolio and more stable returns are increasingly reducing their exposure to equity-based strategies.
There has been improved performance from equity-based managers as the correlation with equity markets has started to reduce
But there has been improved performance from equity-based managers as this correlation with equity markets has started to reduce, experts have said.
The scheme had £265m invested in equity-based hedge funds at March 31 2013, down from £266m the same time the previous year and £391m in 2011.
“The allocation to equity-based hedge funds has been reduced in order to focus on specific strategies within this asset class,” the scheme’s 2013 report states.
Since the 2008 financial crisis many schemes have been looking to improve diversification within their portfolio, which has meant reducing their exposure to equity markets, said Clay Lambiotte, partner at LCP.
“That being said, there has been improved performance from equity-based managers as the correlation with equity markets has started to reduce,” he said.
As an alternative to equity-based hedge funds, schemes have shown increased interest in credit-based hedge fund strategies, Lambiotte added.
Schemes may also reduce their exposure to equity-based hedge funds to get more stable returns, said Guy Saintfiet, UK head of liquid alternatives at Aon Hewitt.
“At the same time I’d be surprised if clients were moving away from it because it’s been one of the strongest strategies this year,” he said.
Most schemes investing in this type of hedge fund use a long/short investment strategy because it is relatively simple and does not use derivatives or leverage, Saintfiet said.
Advisers said it was important for schemes considering investing in equity-based hedge funds to think of them as part of their overall equity allocation.
“If you want an active strategy, [equity-based hedge funds] might be an interesting replacement for equities,” Lambiotte said.
Additional contributions
Diageo made a special £400m cash contribution to the scheme in February this year, bringing the scheme’s funding level up to 102 per cent.
The scheme is following a derisking programme, which aims to reduce the level of risk as the funding level of the scheme improves, by switching out of return-seeking growth assets such as equities and property, into investments with a risk and return profile more closely matched with the liabilities of the scheme such as bonds, the report states.
“Recognising the consequential improvement in the funding level and consistent with the derisking programme, the trustee determined to allocate the cash received to the matching assets element of the investment portfolio,” the report states.
The scheme’s growth asset allocation decreased to 51 percent from 54 per cent the previous year, while its matching portfolio increased to 49 per cent from 46 per cent, according to the report.
In line with its derisking strategy the scheme will also stop investing in European property, in which 11 per cent of its portfolio is currently invested.
