Pensions Conference 2012: Review of Workshop A2 - Investor beware: alternative investments

Ever been dragged backwards through a hedge (fund)?

The presenter urged caution to Trustees (and their advisers) going into alternative investments.  Not surprisingly, he recommended the involvement of a lawyer.  In his view, investment consultants didn’t always have a complete grasp of the legal aspects of alternative investments, to the detriment of clients’ interests.

His starting point was to query the statement of an anonymous consultant that the only difference between a regulated and unregulated investment was that the former had access to the FSCS in the event of something going wrong.

The presenter reiterated that the main duties of trustees were to invest in accordance with the terms of the trust, and to follow the ‘prudent man’ rule (laid down in a court case of 1886).

Additionally, the investment regulations specified that investments should mostly be regulated, that unregulated investments should be kept at prudent levels, that proper diversification should be followed, and that derivatives are only for proper portfolio management purposes.

A guide was given to the main types of regulated funds (UCITS, NURS and QIS) and the main types of unregulated (hedge funds, private equity and derivatives).

The main difference between regulated (authorised) investments and others was that for regulated investments there was a raft of rules specifying how they work embedded in law, although the level of regulation varied from ‘gold’ (UCITS) to ‘bronze’ (QIS).  With unauthorised funds, there were no rules set by law, it was all down to what was agreed between the investor and the managers (hence the need for a lawyer to scrutinise the agreement).

A ‘stop press’ item was the Government’s intention to get pension funds investing in infrastructure via PIPs, although there were many questions to be answered before these get off the ground.