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Pension Plans Pushing Hedge Funds To Change

Like it or not, hedge funds are going to have to adapt to changes brought about by greater investment by pension plans – or else.

Like it or not, hedge funds are going to have to adapt to changes brought about by greater investment by pension plans – or else. Pensions plans, in fact, are going to have a profound impact on the financial services industry, as changes in the way they invest will further blur the line between traditional and alternative investments, according to Watson Wyatt Investment Consulting. "The race for assets among institutional investors in new areas, such as unconstrained and absolute return investing, will result in convergence of organization types, with hedge funds moving into long-only space and traditional fund managers moving into long-short space," says Watson Wyatt. That move, it says will result in "even more product proliferation." Roger Urwin, global head of investment consulting at the firm, noted that top priorities for the majority of pension funds are "creating value through advance investment strategies to cut deficits and implementation of sophisticated risk-management programs." As a result, Urwin said, funds are moving some of their assets "away from benchmark-sensitive approaches to make meaningful allocations to alternative assets and absolute-return products." More and more pension plans, he explained, are "even turning to bond and derivatives markets to implement their Liability Driven-Investment (LDI) strategies." The research, titled Flight Plan, does warn, however, that pension funds need to look at their "governance resources" before they leap into "complex investment models" involving "significant asset diversity and skill-based strategies." There’s a warning to fund managers, too. Urwin said the investment management industry will have to continue to adapt and become more specialized. "What we see happening now," he said, "is another raid phase of change as funds adopt to a more separate approach to ‘alpha’ and ‘beta.’ Managers will have to adapt to this change, which has the potential to threaten the survival of those that either can’t or won’t."

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