Regulatory Reform Looms for Superannuation Funds

Australian superannuation funds need to begin preparing themselves for impending regulatory reform to avoid being caught flat-footed, consultants have warned.

(June 28, 2011) – Australian superannuation funds need to implement reform to preempt regulatory legislation working its way through the country’s government, consultants have said.

The Australian government is drafting legislation dubbed the Stronger Super package in response to the Stronger Superannuation Review—also known as the Cooper Review—that was released last July.

As the reform draws near, consultants are advising superannuation funds to embrace reform sooner rather than later to prevent unnecessary pain.

“Fundamental reform is ahead. Incumbencies will be challenged and opportunities will emerge,” Mercer managing director and market leader for Australia/New Zealand, David Anderson, told Global Pensions. “Early action will mean the difference between recognizing opportunity, only scraping through to meet the regulatory requirements or losing market share.”

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“The Stronger Super reforms will be complex and will likely come with a large implementation cost for funds and providers. An early understanding and preparation will provide an advantage in implementing the changes well before restrictions or limitations on cross-subsidies come into effect,” Anderson said. “Early action could result in significant savings.”

It is presently unclear what specific form the final legislation will take. The Stronger Superannuation Review outlined several recommendations and it is expected that the legislation will be based on the report’s advice.

Perhaps the largest change suggested by the Stronger Superannuation Review was MySuper, a low-cost simple default fund option. If adopted by the Australian government, all superannuation funds will need to offer MySuper within a two-year transition period after its introduction.

Uncertainty over the specific details of the reform is “not enough to justify doing nothing,” Mercer’s Anderson said. “There are definite steps they can take now which will benefit the fund regardless of the final outcome.” His principal suggestion to funds was that they need to consider strategic, operational and member engagement issues.

Click here to see the new GC Australia — a sister publication to aiCIO — that focuses on the Australian superannuation and alternative fund industry, from a securities services perspective.

To contact the aiCIO editor of this story: Benjamin Ruffel at <a href='mailto:bruffel@assetinternational.com'>bruffel@assetinternational.com</a>

Survey: Institutional Investors Pursue HFs, Direct Investing

New research by Citi Prime Finance shows institutional investors had approximately $1.1 trillion in hedge funds in Q1, while an increasing number of fund managers have shifted to direct hedge fund investing following the financial crisis.

(June 28, 2011) — Research by Citi Prime Finance shows institutional investors had $1.1 trillion in hedge funds at the end of the first quarter.

This compares with $125 billion in 2002, an amount that represented about a fifth of the hedge fund industry.

At the same time, following the global financial crisis, the firm found a noticeable shift to direct investing in hedge funds by pension and sovereign wealth funds, as opposed to using traditional fund-of-funds. “While the conventional wisdom is that directly allocated capital is going only to the largest hedge fund managers, we actually found that smaller hedge funds managing between $1 billion and $5 billion experienced the largest net growth in 2010,” Sandy Kaul, US Head of Business Advisory Services, told the Financial Post.

Kaul added: “Fund managers in this range occupy a ‘sweet spot’ for investment allocators, with interest extending as low as $500 million in developed markets and $250 million in emerging markets. Above $5 billion we see a bifurcation in the industry among hedge fund managers that are limiting new investment and those that are developing into larger asset management organizations.”

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The report asserted: “Many pension and sovereign wealth funds began their hedge fund investing program using fund-of-funds as a way to initially access the market and learn about the space. As their education advanced, many chose to begin shifting toward a direct investing program. This was already occurring by 2006-2007, but the financial crisis and Madoff scandal accelerated this trend…”

Citi’s research — titled “Global Pensions and Sovereign Wealth Funds Investment in Hedge Funds: The Growth and Impact of Direct Investing” — found that global pension and sovereign wealth fund allocation to hedge funds currently totals about 3% of the pension and sovereign wealth fund asset pool of $31 trillion, or $820 billion.

Furthermore, the study found that most pension and sovereign wealth funds still seek outsourced chief investment officers, consultants, or fund-of-fund advisors to aid in their direct allocating. “The shift to direct hedge fund investing has been dramatic since the global financial crisis — particularly among larger pensions and sovereign wealth funds,” the report noted. “These participants have not settled on a standard model or approach as most still look to outsourced CIOs, consultants or fund-of-fund advisors to support their direct allocating efforts.”

The study was based on interviews with about 60 major investors representing $1.65 trillion in assets under management as well as hedge fund managers representing $186 billion in assets under management.

Click here to read “The End of the 3 and 30”, from the summer issue of aiCIO, which looks at how hedge funds-of-funds must adapt or perish.

To contact the aiCIO editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742