Hedge funds change in face of pension demands

By Tom Burroughes

LONDON (Reuters) - Proposed laws giving U.S. pension plans more freedom to put money into hedge funds is part of a global trend in which institutions are changing how hedge funds operate, industry figures said on Tuesday.

At present, if U.S. retirement plan assets make up more than 25 percent of a hedge fund's equity, the hedge fund is tightly controlled on how it can invest, but that cap could be raised to 50 percent if U.S. lawmakers change the rules, said Mark Haas, global head of prime brokerage at Deutsche Bank.

"We could see a doubling of the 25 percent that is invested. This will bust open where we are at (now)," he told the Reuters Hedge Funds and Private Equity Summit.

Institutions like pension funds, university endowments and charities have embraced hedge funds in recent years, attracted by the ability of these free-wheeling asset pools to make money in different market conditions.

In the United States, institutions embraced the hedge fund investment model relatively early, though growing numbers of retirement funds in Europe and elsewhere are following suit.

The U.S. Pension Protection Act is being debated in Congress and, if changed, could encourage a heavy inflow into hedge funds from corporate pension schemes in the U.S., Deutsche's Haas said.

In Britain, however, hedge funds account for less than 1 percent of all pension fund assets, according to data issued earlier this year by Mellon Analytical Services.

It is rather odd that UK retirement schemes have so far been relatively shy of hedge funds, given their ability to preserve capital and grow wealth at a steady pace, exactly as pension funds need, Nicholas Roe, managing director and European head of equity finance at Citigroup, told the summit.  Continued...