Dutch Pension Giant Ditches Hedge Funds | Chief Investment Officer

One of the Netherlands’ biggest pension funds has “all but eradicated” its allocation to hedge funds.

Pensioenfonds Zorg en Welzijn (PFZW), which runs pensions for the country’s health and social care workers, cited complexity, costs, and sustainability issues with the asset class in a statement published this morning.

“With hedge funds, you’re certain of the high costs, but uncertain about the return.” —Jan Willem van Oostveen, PFZWFollowing the adoption of a new investment strategy, hedge funds no longer fit the investment criteria for the €156.3 billion ($184.7 billion) pension. PFZW was one of the first Dutch pensions to allocate to hedge funds, initiating a position in 2003. Asset manager PGGM, which was split out of the fund in 2008, is responsible for the fund’s investments.

“With hedge funds, you’re certain of the high costs, but uncertain about the return,” said Jan Willem van Oostveen, manager for financial and investment policy at PFZW.

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The pension also voiced concerns over the “often limited concern for society and the environment” expressed by hedge funds.

“For a long time, hedge funds were a useful tool [for diversification], but lately they have not made a sufficient contribution to this objective,” the statement added.

PFZW has increased its target allocation to equities as a result of the removal of hedge funds from its long-term plan.

In 2013, 2.7% of PFZW’s assets were invested in hedge funds. According to its third-quarter report, this had fallen to 2% by the end of September 2014.

The decision follows the California Public Employees’ Retirement System’s move—announced last year—to cut hedge funds from its portfolio because the allocation was not scalable.

The bankrupt city of San Bernardino, California, is being sued by holders of its pension bonds in a challenge to last year’s ruling in favour of the California Public Employees’ Retirement System (CalPERS).

CalPERS had successfully argued that San Bernardino should meet its payments to the $300 billion pension before paying other creditors, but two investors that lost out have challenged the agreement.

New York-based Ambac Assurance and EEPK, part of Germany’s Commerzbank, are owed more than $59 million, according to the Sacramento Bee. The firms claim their holdings in pension obligation bonds—issued specifically to help fund municipal pensions—should be paid alongside CalPERS.

CalPERS has not been named in the lawsuit but is reviewing the case, a spokesperson told Bloomberg.

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The case echoes that of Stockton, California, which, like San Bernardino, declared Chapter 9 bankruptcy in 2012. Last year, a judge ruling on the case reversed a decision that would have left Stockton public employees facing pension cuts of up to 60%.

One Stockton bondholder, Franklin Templeton, was reported to be in line to reclaim just 1% of a $36 million investment. It has since appealed the decision.