Analysis: UK local authority pension schemes cut hedge fund bets

By Maiya Keidan and Carolyn Cohn

LONDON (Reuters) - Britain's top local authority pension plans have cut investments in hedge funds in favour of better-performing alternatives, a review of annual reports shows, adding pressure to an industry beset by weak performance, outflows and fund closures.

A Reuters analysis found the value of hedge fund investments at the biggest ten local authority pension schemes in England and Wales fell by 9 percent to 1.5 billion pounds ($1.9 billion) in the 12 months to the end of March.

The schemes collectively manage 102.7 billion pounds and provide the best window on the thoughts of the UK pensions industry as most other public and corporate pension schemes share little information.

Pension funds are key investors, as they tend to park their money for the long term, and public pension funds account for about a fifth of hedge fund assets globally.

The figures add to signs of pressure on hedge funds.

Data from industry tracker eVestment showed investors of all stripes pulled $14.8 billion from hedge funds globally in January-November 2018, contributing to a number of high-profile fund closures, including Highfields Capital, Decca Capital and Latimer Light Capital.

The analysis of the annual reports, which were mainly released in November and December, found reductions in hedge fund assets at five of the ten pension schemes, with three cutting the number of hedge funds they invest in.

"The industry has seen some redemptions from pension funds who have not seen enough value for money from hedge funds," said Sara Rejal at consultant Willis Towers Watson.

One of the biggest reductions came from the West Yorkshire Pension Fund (WYPF), which cut its investment by half to 127.6 million pounds, from 254.3 million pounds, redeeming cash from hedge fund investing strategies run by Aurum and BlackRock.

"Hedge funds were reduced in favour of better, more consistent returns from other alternative asset classes, which have been increased in the year," a scheme spokesman said, without giving details.

Other alternative asset classes are likely to include areas such as private equity, infrastructure and property funds.

The reduction in money allocated to hedge funds marks a turnaround from the previous year when local authority pension scheme investments in the sector increased in value by a third, and follows a lacklustre year for hedge funds compared with other asset classes.

Hedge funds made an average of 5.9 percent in the 12 months to the end of March, according to data from Hedge Fund Research (HFR), although performance into the end of 2018 worsened for many, prompting outflows.

Other alternative asset classes enjoyed double-digit returns, according to data firm Preqin.

The local authority pension reports are a once-a-year opportunity to parse the books of the schemes, but the data is not presented in the same way by each fund and neither do they hold a common view about what constitutes a hedge fund.

Reuters defined a hedge fund as either one that describes itself explicitly as a hedge fund, or one that charges a performance and management fee.

WYPF, the third-largest local authority pension fund in England and Wales with 13.6 billion pounds in assets, was the only one to publish detailed hedge fund performance data.

Its hedge fund investments gained 2.1 percent in the 12 months to March 31, below 11.3 percent from its direct property portfolio and an internal rate of return from its infrastructure investments of 6.9 percent.

($1 = 0.7891 pounds)

(Reporting by Maiya Keidan; Additional reporting by Simon Jessop; Editing by Mark Potter)