By Maiya Keidan and Carolyn Cohn
LONDON (Reuters) - Local government pension schemes in Britain pulled money out of hedge funds last year, shifting cash to infrastructure projects such as wind farms and to private equity, a Reuters analysis of annual reports shows.
Local government schemes, which are among the largest pension investors in Britain, slashed their investments in hedge funds by a third in 2019, amid concern about low returns and high fees, the analysis shows.
The drop reflects a difficult year for hedge funds, with $65.86 billion yanked by investors globally in the year to March 2019 amid flat returns, according to data from eVestment. The FTSE 100 index rose 3.7% over the same period.
Hedge fund investments at the 10 largest local government pension schemes in England and Wales, which together manage 108.7 billion pounds ($141.92 billion), fell to 854.3 million pounds from 1.3 billion pounds, in the 12 months to end-March 2019.
The top 10 local government schemes are collectively bigger than any scheme run by a major private company or university in Britain, providing a key window on the strategy of UK pension managers.
It was the second year in a row that the UK schemes have pulled money from hedge funds, the Reuters analysis showed.
"Hedge funds have come under the spotlight in two areas in the last few years," said Colin Cartwright, partner with Aon Hewitt's Global Investment Practice. "Performance, when you compare them with equity markets has not been great... and a greater focus on fund management fees."
Hedge funds typically charge both a management and performance fee.
By contrast, the pension plans added 958.6 million pounds to infrastructure investments, an increase of 24% from last year, including to projects such as Clyde Wind Farm in Scotland, one of Europe's largest operational windfarms.
Groups of local government pension schemes (LGPS) have started to pool their assets into large funds following rule changes in 2015, designed in part to boost their investments in infrastructure. The ruling Conservative party has also said it wants to spend more on infrastructure, particularly in the north of England.
Investments in private equity, which have long been favoured over hedge funds, also rose by 597 million pounds, a 10.4% gain.
For an interactive version of the graphic, click here https://tmsnrt.rs/2QZM3ma.
Pension funds are important investors because they tend to park their money for the long term, and public pension funds account for about a fifth of hedge fund assets globally.
Hedge funds are often perceived as riskier investments and government-run funds, such as these pensions, generally face pressure to stick to more staid places to put their money.
However, one of the top 10 LGPS, Kent, which did not invest in hedge funds but does invest in private equity, came under fire last year for its additional exposure to unlisted stocks via the now-closed Woodford Equity Income Fund.
Of the five LGPS schemes to invest in hedge funds, three said they had cut back, including South Yorkshire, which continued to reduce its allocation to U.S.-based Permal Group, while one suffered losses.
Lancashire's hedge funds investments dropped 14% to 372.7 million pounds, but they declined to disclose whether they had redeemed cash or suffered losses as a result of poor performance.
Since March 2019, though, hedge fund returns have picked up, and a source at one LGPS said it has increased its hedge fund allocation.
The hedge fund industry made a 4.6% return between the end of March and the end of December, according to data from Hedge Fund Research, outperforming the FTSE 100, which rose 3.6%.
"Given the current environment, we would counsel investors to exercise a degree of caution in drawing too many conclusions on whether to switch out of hedge funds," said Benjamin Cooper, head of manager research at investment consultant Cardano.
(Reporting by Maiya Keidan and Carolyn Cohn; Additional reporting by Simon Jessop; Editing by Susan Fenton)