Despite Promises, European Institutions Never Got Into Hedge Funds

GREENWICH, Conn. (HedgeWorld.com)–European institutional investors never warmed up to hedge funds the way they once seemed poised to do, and now a renewed conservatism in asset allocation may mean a fizzling of the relationship altogether.

Despite telling Greenwich Associates officials for the past three years that they planned to up their allocations to high-alpha strategies that included hedge funds, European institutional investors never put serious money into such strategies. Today the average allocation is around 1%, a level that a new Greenwich research report considers little more than dabbling.

And there are signs in Greenwich Associates’ 2005 report on the European investment management industry that preferences are shifting away from hedge funds and higher-yielding strategies, despite eroding funding ratios at pension funds. Greenwich said in the report this movement could be due largely to the demands of new mark-to-market accounting rules that have caused European institutions to halt shifts of assets from government bonds to equities and other higher-yield investments.

The new international accounting conventions, which require assets to be market to market on the books, sometimes causing significant fluctuations in value particularly among less liquid instruments, are gaining acceptance across Europe, according to Greenwich Associates. “The movement appears inexorable,” said Chris McNickle, a consultant at Greenwich, in a statement.

The result is that pension funds are increasingly hesitant to shift assets away from easy-to-value, less volatile securities. Problematically, demographic, social and macroeconomic pressures are eating away at funded levels for pension funds, forcing them to seek higher returns. In 2003, the average European pension fund was 105% funded, according to Greenwich research. By 2004, the funded ratio at a typical pension plan had fallen to 95%. In certain countries and regions, it was even lower.