Fast-tracking alternatives

The recent announcement that UK pension fund Railpen has set aside four percent of total assets for allocation to hedge funds should come as no surprise: it has always been an adventurous investor. Andy Thomson reports.

According to a recent survey from Russell/Mellon, a provider of investment analysis tools for institutional investors, UK pension funds committed just 0.2 percent of their total assets to alternative investments last year. Against this background, Railway Pensions Trustee Company (Railpen) might be viewed as something of a pioneer given the £600 million (€874 million; $1.1 billion) it has just committed to hedge fund programmes – accounting for around four percent of total assets.

But if you delve into the organisation’s past, you will find that bold investment decisions are nothing new for Railpen – formerly the British Rail Pension Fund – which acts as corporate trustee of various railway industry pension funds. Turn the clock back 30 years and the organisation could be found investing more on the basis of art than science – literally. Railpen devoted three percent of its assets in the mid-1970s to a fine art collection with the intention of obtaining an inflation-linked return to pay inflation-linked pensions. The collection met its target by delivering inflation plus four percent a year during the period of ownership.

It could be argued that, by comparison, the firm’s move into private equity in 1988 was a fairly conventional one until you remember that private equity is still seen as dangerous territory for UK pension fund investors today – back then it was a nothing short of a forbidden zone. Railpen initially tested the waters by investing solely through London-based buyout firm Cinven, but in 1999 – under the leadership of new CEO Chris Hitchen, who had taken the helm the previous year – the decision was made to up its allocation to a heady 3.25 percent of total assets. Funds raised by Hermes Private Equity and HSBC Private Equity have been among the subsequent beneficiaries.

Fast-forward to March 2005, and the decision to allocate £200 million each to New York-based Blackstone Alternative Asset Management, Chicago’s Grosvenor Capital Management and Washington DC-headquartered The Rock Creek Group. In a statement, Railpen said each of these investors would create managed accounts and invest in around 30 hedge funds.

Railpen is looking for safety-first, not stellar returns

Chris Hitchen, CEO, Railpen

Railpen has set a target return for its hedge fund programme of Libor (the London inter-bank rate) plus four percent. “The hedge fund universe is becoming ever more crowded, but Railpen is looking for safety-first, not stellar returns,” said Hitchen in a statement.

But this is Railpen we are talking about, and no-one should confuse “safety first” with unadventurous. It is understood to be planning the further expansion of its alternative asset universe soon: with infrastructure projects and commodities tipped to be next to receive the Railpen vote of confidence. In the GP community there is considerable frustration at the antipathy pension funds seem to have for alternatives. This is one LP that appears to be on the right tracks.