FRANCE - The FRR, the €27.7bn Fonds de Réserve pour les Retraites or French Pensions Reserve Fund, has explained why it will not be investing in hedge funds as part of its new strategic asset allocation which features a shift towards 'alternative' assets.

The fund last week announced a revised allocation emphasising alternatives such as private equity, commodity indices and real estate and infrastructure. A notable absence from the programme was hedge funds.

"We studied it," said executive board member Antoine de Salins in an interview with IPE.

Christophe Aubin, the fund's head of investment strategy and risk budgeting, added: "What we found is that there is a clear risk bringing value in terms of risk/reward over the asset class."

It did not increase the "efficient frontier".

There were financial reasons, in that commodity indices and real estate were deemed more appropriate. And there are also potential problems in choosing hedge fund managers and with risk management.

"There's a big survivor bias," de Salins said.

In essence, the shorter-term benefits of hedge funds did not fit in with the fund's long-term time horizon.

Aubin also said that the planned 10% allocation to alternatives could be a "transitory stage" for the FRR. "Maybe in future it could be more. For us it's just a step."

If it wanted to raise the allocation it would need to go to its board in 2007/08 to look at the results of the alternatives portfolio.

De Salins pointed out that just having two asset classes, bonds and equity, was a major source of risk.

The fund's current tender for private equity should be finished at end of autumn, the executives said.

But investments in real estate, where it feels it would need to be flexible, would require a modification in the law, which de Salins hopes to have in place by the end of the year. It was just a technical, not a political, issue he said.

As for commodity indices, the FRR is currently examining the way to invest.

Infrastructure investment was possible alongside other institutions investing together in closed funds, to increase bargaining power, de Salins said.

The fund will be likely to re-tender some of its mandates, such as passive equities, as required under public procurement rules next year.

The new asset classes would also require new staff, de Salins noted - adding that some 10-12 new people are being recruited.

"Clearly if we want to invest in these new asset classes we need the expertise. We need specialists in real estate and commodities."


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