Hedge Fund-ing the Pension Deficit: The Case for UK Schemes

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Select hedge funds have provided attractive long-term returns with reduced equity beta and can be integral to pension investment strategies

  • Continuously low interest rates have driven funding levels lower for many defined benefit pensions over the past seven years, highlighting plan trustees’ continued need to allocate funds to risk-controlled growth strategies that can help close the deficit.
  • Low beta hedge funds may help pension schemes generate excess returns with limited directional equity exposure, thereby diversifying the portfolio, improving risk-adjusted returns, and reducing potential funding level drawdowns.
  • Including hedge funds in a de-risking strategy is especially attractive in the current environment, as record low bond yields and overvalued equity markets present limited return opportunities and increased risk across traditional assets.
  • Given the significant dispersion in hedge fund manager and strategy returns, effective manager selection and portfolio construction are critical.