University fund to boost hedge fund investments by 1.4 billion pounds

The 28 billion pound British universities pension fund is set to invest a further 1.4 billion in fixed income as it seeks to reduce its equity allocation in a bid to lower risk, its chief investment officer said. The University Superannuation Scheme (USS) is also ploughing a similar amount into hedge fund investments.

"Over time as the scheme matures and our funding ratio improves we are likely to move more in to fixed-income assets," Roger Gray told Reuters on Monday.

The fund's allocation to bonds is expected to rise to 15 percent from 10 percent, while hedge fund investments are set to rise to 5 percent from 1 percent of total assets, Gray said.

The scheme's relatively high equity exposure of 70 percent of assets resulted in the fund losing about 7 billion pounds during the credit crisis, slumping to 21 billion pounds in the year to March 2009 - the lowest since March 2004.

As part of its expansion into fixed income the scheme may consider investing for the first time in British index-linked gilts, but would wait until yields on the 45-year paper increase from 45 basis points, Gray said.

"It would be a useful asset if it were priced differently," he said, adding the fund would expand beyond government bonds as the fixed income allocation grows.
Since Gray took over his position four-and-a-half months ago, the fund also made its first active hedge fund investment. He declined to quantify the size of the mandate, but said it amounted to "hundreds of millions".

Total hedge fund investments are expected to rise during the next two years and the fund may hire up to 30 hedge fund managers. It will keep its hedge fund replication strategy run by State Street.

The fund is also considering boosting its emerging markets investments, which amount to 5 percent "by a couple of percentage points over time," Gray said.

"The global economy is liable to become more balanced, more multi-polar and a number of major economic powers of the 21st century are currently referred to as emerging," he said.

The scheme hired emerging markets specialists Carmel Peters, Chris Shale from asset manager RWC Partners and Danila Gallarato, previously of the sovereign wealth fund Abu Dhabi Investment Authority.

-Reuters