The CAD90 billion (US$81 billion) Caisse de Dépôt et Placement du Québec will increase its hedge fund allocation to 5% from 3% over the next 24-36 months. Panelists speaking at the Fifth Annual Canada Cup of Investment Management on June 6 said they expect more Canadian plans to enter the hedge fund arena as their comfort level improves, and they reckon that funds that have already invested will increase their exposures.
Canadian funds that invest in hedge funds average 3% allocations and have been slower to move into the space than their U.S. counterparts, panelists said. “It’s just a matter of an educational process that’s been going on for the last two years,” said Michael Sacke, a consultant at Watson Wyatt Worldwide in Toronto. Some of the 20-25 largest pensions in Canada have yet to invest in hedge funds or private equity.
All the education on hedge funds may soon turn into action, said Frank Belvedere, principal at Mercer Investment Consulting in Montreal. The 3% average is the entry point, but not the ultimate, he said. “Over the last year rates have risen to more normal levels and volatility is now increasing,” he said. “Risk premia are on the way up, as witnessed in the correction in equities, particularly emerging markets. Once the correction occurs, the base will be set for higher returns [in hedge funds].”
Private equity and hedge funds are commanding equal attention at present from Canadian plan sponsors, he added.
Pension plans have historically preferred private equity to hedge funds because it’s easier to understand, Belvedere continued. Padraig Connolly, v.p. of client services at the Bank of Ireland Asset Management in Toronto, said private equity has been more attractive over the last few years given the better returns. “It’s fair to say that if a fund is already invested in private equity and the institution has developed an expertise with these sophisticated investments, it will be easier for them to consider hedge fund exposure,” he noted.
The Caisse de Dépôt invests in 100 hedge funds, said Jean-Claude Galarneau, senior hedge fund analyst, and most of these are direct investments. In such a fragmented market it can be tough differentiating one manager from another, and recommendations come via word-of-mouth. “The best managers will select their investors,” he told delegates. The Caisse de Dépôt seeks hedge funds that pay adequate compensation to retain talent, share equity with key individuals and sign non-compete agreements to mitigate the risk of losing key people. Galarneau thinks many of his peers that already invest in hedge funds are keeping their exposures at a standstill due to recent lackluster returns from the asset class in general. His fund, however, enjoyed double-digit returns last year from its hedge fund allocation.