Editor's letter: Nothing for nothing

One of the worst kept secrets in the US and UK pension fund industries is that both are in a bit of a pickle. Television and print media on both sides of the Atlantic have been littered with reports regarding pension fund 'holes' or shortfalls since the global equities markets started heading south in early 2001.

The continued poor performance of the equities markets, combined with increased longevity of pensioners – clearly obesity and heart disease are not affecting life expectancies quite as acutely as we have been led to believe – and the decreasing proportion of the population entering the workforce, have exacerbated those problems, placing pension funds in the unenviable position where their liabilities far outweigh their assets. UK-based pension funds were dished up an additional dose of bad news with the introduction of FRS 17, which requires pension funds to disclose information on their liabilities and assets determined on a 'fair-value' basis. In practice, this means that UK pension funds have been forced to disclose their assets and deficits on their balance sheets instead of being able to 'smooth' those deficits over a five-year period, a common practice under IAS 19 prior to the adoption of FRS 17.

But what does this accounting stuff mean to the investment management industry? Well, in short, it's good news because pension funds have been forced to look to the alternative investment management space as a source of alpha in an effort to refill the company coffers. But there's a catch: pension funds are different animals compared to the types of investors hedge funds are used to dealing with – high-net worth individuals, private banks and family offices. As a result, pension fund assets have strings attached to them, like seeking greater transparency into the way hedge funds run their businesses, the ways they make their investment decisions, and the technologies they've deployed to systematise those processes.

This month's cover story deals with the continued flow of pension fund assets into the hedge fund industry and the associated expectations on the part of the pension fund trustees for 'guarantees' that their allocations will be well looked after (although in the hedge fund industry we've all come to understand that there are no such guarantees).

Also in this issue, David Walker looks at the potential stumbling blocks for buy-side firms investing in the emerging markets of the Far East, and this month's software feature focuses on risk management technologies for the buy side. >