One of the country’s most influential local government employee pension funds has pulled its entire investment from the giant hedge fund Brevan Howard because it refused to disclose what it was investing in.
The decision by the London Pension Fund Authority was seen as a serious potential threat to the famously secretive world of hedge funds.
Pension savings now make up more than a third of hedge funds’ total investor base. The pension managers were lured into backing them due to their higher returns. But those returns have been less than stellar recently, leading to doubts over whether the star “hedgies” really deserve the high charges they levy.
The LPFA, which invests the retirement savings of former employees of the Greater London Council and Inner London Education Authority, had requested details of Brevan Howard’s trading positions. But the company, the third biggest hedge fund in the world, refused.
It remains to be seen if other public sector pension funds will follow suit. If they do, hedge funds will be left with a dilemma - to reveal their secret trading strategies or see billions of pounds of investment disappear from their funds. That could see them have to revert to being investment boutiques for the very wealthy.
Brevan Howard has grown rapidly as traditional investors like pension funds have been tempted on board against the backdrop of low interest rates on other classes of investment. Co-founder Alan Howard is now one of Britain’s richest men, with a personal fortune of more than £1bn.
The LPFA, which is chaired by the private equity and pensions tycoon Eddie Truell, was one of the first public pension funds to back hedge funds.
Its action came as the Government has questioned whether any state employee pension funds should be investing in expensive hedge funds due to the poor returns currently being made. Brevan Howard’s fund returned only 2.6 per cent last year, forcing Mr Howard to write to investors and admit it had been a “disappointing” year.
The Financial Times reported that as hedge funds become increasingly reliant on local government employees’ pensions they were turning, essentially, into contractors to the public sector. This places an inherently higher burden of transparency on them.
However, they counter that their investment strategies must remain secret because if rivals discovered and copied them the prices would move and lead to weaker returns for investors.
The LPFA declined to comment on its decision.
Brevan Howard manages $12.3bn (£7.68bn) of pension fund money, according to consultancy Towers Watson.