Clwyd Pension Fund, currently valued at £611m (e884m), is one of a growing number of local government pension funds in the UK that have made substantial allocations to alternative investments. Alternatives now represent 22% of the fund’s total portfolio.
Of this 4% is allocated to currency funds, 4% to private equity, 5% to property, 2% to an active tactical asset allocation active fund and 4% to hedge funds of funds.
Clwyd Pension Fund has been involved in hedge funds since 2001 when it invested in a Barclays Global Investors (BGI) market neutral hedge fund. The fund, which represents 10% of the total portfolio, has since been equitised with a FTSE overlay and is therefore classed as equity.
It also invested in currency hedge funds operated by Gartmore Investment Management and Goldman Sachs Asset Management.
In April 2004, the fund decided to broaden its hedge fund exposure with an allocation to hedge fund of funds.
David Bamber, assistant county treasurer, technical and pensions at Flintshire County Council, the lead manager of the Clywd Pension Fund, says. “The decision to buy a hedge fund strategy in 2001 and 2004 formed part of the fund’s overall asset allocation process in the same way as the decision for any other asset classes.”
The move into hedge fund of funds investment followed a fundamental review of fund management arrangements, which Clywd Pension Fund carries out every three years. Part of this review was an optimisation exercise – a modelling exercise that predicts future investment outcomes based on historical data.
The optimisation exercise was carried out as part of the pension fund management panel’s aim of increasing potential return while reducing risk, thereby increasing the fund’s information ratio.
“The exercise demonstrated that alternative investments, such as hedge fund of funds, not only add performance, but reduce risk and increase diversification,” says Bamber. “Furthermore, a hedge fund of fund manager embraces a number of investment strategies. Therefore, hedge fund of funds and absolute return products makes eminent sense to a liability led pension fund.”
After a long due diligence process, the fund appointed two hedge fund of funds managers, Quellos Institutional Partners and Pioneer Alternative Investments to manage a hedge fund of fund mandate of around £11m each.
PAI, which manages e2.7bn, is part of Pioneer Global Asset Management, a subsidiary of the Unicredito Italiano Banking Group. Quellos is part of the Quellos Group, the biggest hedge fund of funds manager in the US.
The PAI mandate is based on the Momentum AllWeather Fund, which invests in a diversified range of 30 to 40 hedge fund managers and is aimed at investors who are looking for absolute returns of Libor plus 6%. The fund has delivered an annualised return of 9.3% with volatility of 3.37% since it was started in 1995.
The Momentum AllWeather fund combines several non-traditional investments strategies, primarily event-driven. These are structured to perform during all stages of the economic cycle.
During boom periods the lead strategy is merger arbitrage. During periods of slowdown, the lead strategies are convertible arbitrage and global trading. During economic recovery the lead strategies are equity hedged, long and short, and tactical trading. And during recession the lead strategies are distressed securities and loan origination.
Bamber says that, so far, hedge fund investments have performed satisfactorily. “The pension fund has had good performance from the BGI market neutral fund. In the case of the investments made in 2004, it is early days.”
Clwyd Pension Fund will review its hedge fund investments next year, as part of its triennial review of fund management strategy, he says. “Future investment direction will be dictated by the outcomes from this review.”

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