Aon partners Guy Saintfiet and Tim Banks
Market volatility and wider macro-economic uncertainty is driving a surge in hedge fund investment from UK defined benefit (DB) pension schemes, Aon says.
The consultancy and fiduciary manager said a combination of circumstances has led to the increased take-up from pension schemes which are again seeing hedge funds as a means both to drive returns and to strengthen the resilience of their portfolios.
It added that an increased focus on endgame – including planning for a buyout or for running-on – is prompting many schemes to look at shorter-term investment horizons, particularly more "agile" hedge fund investments.
Aon partner and head of Europe, the Middle East and Africa fund management Guy Saintfiet said: "The current economic backdrop and the changing investment needs of UK pension schemes has led to many reviewing their portfolios.
"Unlike the defined contribution scheme sector, where there is an increased emphasis on illiquid investments, the shorter-term investment horizons of DB schemes – prompted by thoughts of moving to a risk settlement solution or plans to run-on – have made illiquids less of an option and reopened greater interest in more agile hedge fund investment."
Aon noted its own hedge fund solution had seen a "significant" increase in new mandates and a rise in assets under management of over a third during the past year as schemes increasingly look to offerings that can deliver steady absolute returns, diversification versus equities and credit, as well as downside protection.
Saintfiet noted: "Schemes are obviously seeking hedge fund solutions that give strong investment results but there is also a heightened emphasis on liquidity, cost and ESG integration that is in line with the governance needs of institutional allocators. Funds that offer that combination are increasingly attractive."
Aon partner Tim Banks agreed: "Different economic times demand different investment approaches, and hedge funds are currently offering an opportunity that pension schemes need. But that need is not restricted to just pensions - we have also seen increased uptake from other investment clients such as endowments and foundations. Unlike many DB schemes, they do have a longer investment horizon but given the wider market volatility, they are choosing to use hedge funds tactically and as a place to park cash for commitments made to illiquid investments."
