A number of super funds are still reluctant to embrace hedge funds in their alternative allocations, because of high fees and complex investment strategies.
"Over a period of time in the past, we were also invested in hedge funds, but having commissioned a review of hedge funds we resolved that the case of hedge funds in our particular circumstances was not something that we felt held true and, therefore, we exited hedge funds," Legalsuper chief executive Andrew Proebstl said.
"We have no allocation to hedge funds," he said during a panel discussion at the Finsia Financial Services Conference 2012 in Sydney yesterday.
Asked what led the fund to this decision, Proebstl named fees and complexity as two important obstacles.
"Fees are definitely of such a high level that it makes it difficult to justify an involvement," he said.
But the difficulty in getting members to understand what it is they are investing in was an equally important consideration, Proebstl said.
"As a superannuation fund you have to communicate to members what you are invested in and how that investment operates. They expect us to explain to them how a hedge fund works and there are a myriad of different types of hedge funds," he said.
"One of the considerations was: can we adequately and sufficiently explain to our members what it means to invest in hedge funds?
"It is fine for us, who are involved in the industry, to discuss hedge funds, but you need to communicate clearly and transparently to your members what it is that you are investing in," he said.
This need for transparency creates it own set of problems, not in the least the result that strategies get toned down to such a degree they don't provide adequate levels of diversification or return.
Proebstl views were supported by VicSuper chief investment officer Oscar Fabian, who also does not have an allocation to hedge funds.
Instead, he uses a real-asset bucket for alternative allocations.
"In that [bucket], we put all of our property, infrastructure and all of our alternatives," he said.
"We don't have hedge funds; that is more because of the reputation they have rather than the concept itself. I think there will have to be a chance of either name or at least attitude before hedge funds take off again," he said.
But QIC Capital Markets managing director Troy Rieck said that hedge fund strategies, such as derivate use, can be appropriate if they are used responsibly.
"Like everything we do in superannuation it has to be fit for purpose," he said.
"If you use derivates to speculate and gamble and leverage the fund 10 times, then you will get the outcome you deserve."
"But if you use derivatives to express your investment thesis and get a more efficient investment thesis in place than there is nothing wrong with that," he said.
Local Government Super chief investment officer Craig Turnbull also said there were situations where hedge funds provided an appropriate source of diversification.
"One thing in defence of hedge funds: you can find certain classes of hedge funds that do quite well in the portfolio; funds that on average do just as well as the other markets, but can often perform quite well when other markets are falling," he said.
Turnbull singled out future strategies as an appropriate strategy for portfolio diversification.
Qsuper head of funds management investments Charles Woodhouse agreed that hedge fund strategies could provide a counterweight to equity risk.
"We are looking for low correlation to listed equities, because that is the largest risk we have in the portfolio," Woodhouse said.
As long as managers were aware of the risks involved in the investments and allocated to this risk appropriately, hedge funds could provide a welcome source of return.
"There are some attractive characteristics there, but there are risks associated with it," he said.
"We are not taking a fixed income view to a fixed income private asset switch (credit default swap). Those markets can become very illiquid," he said.
