UK – An increasing number of UK pension funds are looking to invest in hedge fund of funds - but they need to be aware of how to identify the right fund. So says manager of managers Io Investors.

It is estimated that the percentage of UK pension fund assets invested in hedge funds is below 1%, despite around 50% of trustees claiming to be “considering” the asset class.

For the majority of schemes, the hedge fund of funds route is still the preferred option as it allows the investor access to a broader number of hedge fund strategies, and more pension plans are expected to broach the asset class in order to increase diversification in the future. Schemes tend to start by allocating between 5% and 10% of assets to the class, although Io’s chairman Jonathan Punter believes this figure should be nearer 15%.

Chris Jones, director of alternative investment strategies at Io, says there are certain rules, however, that pension funds should abide by if they are to choose the correct hedge fund of funds.

Firstly, says Jones, “do not be seduced by track record alone”.” Pension funds should “delve down beneath the surface to ensure that there is adequate diversification by manager and strategy”, and the fund of funds should be transparent with regards to the funds in which they are invested.

Jones also adds that the individual manager’s expertise is as important as the experience of the group as a whole, and experience in managing on the behalf of other UK pension plans is a must.

Risk management and monitoring is another key issue that should be discussed in the selection process. “Find out what kind of risk monitoring they do. Be sure our hedge fund of fund manager realises he is a risk manager as well, and see how regularly they contact the managers of the underlying funds,” says Jones.

Io investors are a subsidiary of Sanlam Limited, one of the largest providers of financial services in South Africa.

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