Pension funds should use the sophisticated risk management tools used by the best hedge funds to lower volatility and achieve better returns, says Cern Pension Fund CEO Theodore Economou.
Pension funds should use the sophisticated risk management tools used by the best hedge funds to lower volatility and achieve better returns, says Cern Pension Fund CEO Theodore Economou.
Cern invests its entire CHF4bn ($4.1bn) pension fund as if it were a large global macro hedge fund. “We manage towards an absolute return target,” says Economou. “We believe our model can and should be replicated by pension funds with the same goals as Cern because we think the model represents an answer to the industry’s challenges.”
For those funds not able to replicate the Cern model, Economou advocates turning over the entire pension fund portfolio to a top hedge fund management company.
If the hedge fund industry works together with pension funds, he believes it has the potential to grow five or 10 times larger than it is today.
Economou made the comments at the European Single Managers Awards 2013 held in London, where Cern Pension Fund was given the award for outstanding contribution to the hedge fund industry by an institution.
Earlier in a video interview he said he believes the hedge fund industry can “come to the rescue of the pension fund industry”. He believes the disciplined risk management of hedge funds allows them to control risk while at the same time delivering smooth returns. “This is exactly what pension funds need to do.”
Risk management combined with flexibility in allocating assets under the overall objective of preserving capital needs to be embedded in the entire process, he says.
“I believe passionately the Cern model provides an ideal response to the challenge pension funds are facing,” says Economou.
The Cern governance model is designed to accommodate a dynamic and flexible asset allocation process, which Economou believes is essential in order for pension funds to avoid losses and meet returns in the long term with minimum volatility.
“The Cern process starts with addressing what really matters to trustees: what losses can be accepted; what is the investment return objective; and what are the constraints in terms of liquidity and permitted instruments? Only after setting these boundaries does the portfolio get built to meet those objectives.”
Economou has taken the traditional process and “turned it on its head”. “The fact is that the traditional model is failing to deliver,” he says.
In his view in order for a pension fund to be more conservative it needs to be less traditional and throw out the 60%/40% stocks/bonds model.
Over the three years since Cern’s switch from the traditional model to implement Economou’s ideas, the fund has “multiplied the efficiency of taking risk and converted it to return by a factor of 10. It is bringing this risk awareness in the process that has had the most impact.”
A report on the full interview with Theodore Economou will be published in the June issue of Hedge Funds Review
This article was first published on Risk
