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APRA warns on hedging

SUPERANNUATION fund managers who resort to investment in high-risk hedge funds to escape from negative returns will come under increasing scrutiny in coming months.

The general manager of the Australian Prudential Regulation Authority, Wayne Byres, made the warning as hedge fund investments continue to gain prominent positions on superannuation fund portfolios.

“If APRA is not satisfied that an investment in hedge funds is to the benefit of fund members, it will step in to protect their interests,” Mr Byres said.

He said hedge funds were growing in popularity because they offered the potential for greater diversification in asset classes and absolute returns for less risk.

With superannuation funds under increasing pressure to return to positive territory, diversification in the asset classes and investment in assets with negative or low correlation with existing investments are becoming more prominent.

Weak equity markets and low interest rates have created an environment where hedge funds could provide returns even as the market continues to fall away.

“What is becoming obvious, however, is that while some hedge funds are professionally managed and regulated, they can still lead to significant losses in a relatively short space of time, particularly when gearing is used,” Mr Byres said.

APRA is concerned that hedge funds rely heavily on a single strategy – with broad delegations for the use of gearing and derivatives – and on a single individual to execute investment management process. They also normally have only a short track record.

An APRA report explaining how hedge funds operate and the potential pitfalls warns that superannuation funds, which are traditionally conservative by nature, are more likely to be searching for maximum returns.

“Hedge funds are traditionally marketed as investment vehicles for sophisticated, high net worth individual,” APRA says.

“It is open to question as to the extent to which they are an appropriate investment for retirement savings of all members of the general public. It is questionable whether superannuation monies should be on the cutting edge of financial innovation.”

The number of complaints from members in relation to their superannuation funds has already been steadily increasing due to, among other things, concerns with investment decisions.

During the December quarter the Superannuation Complaints Tribunal received 567 new complaints, 2 per cent higher than the previous quarter. Complaints have risen by around 20 per cent over the past year.

Figures from the Australian Bureau of Statistics show the level of monies held in managed funds, and more specifically in superannuation funds, recovered some ground in the December quarter. The numbers also show the increased flight into short-term securities and cash.

As at December 31 2002, consolidated assets of superannuation funds were $296.4 billion, up $5.8 billion, or 2 per cent, for the quarter. Holdings of short-term securities increased by $4.6 billion, or 26 per cent, of which bills of exchange increased $1.7 billion or 28 per cent. Cash and deposits increased 7 per cent.

Since the June quarter of 1999 total assets held by superannuation funds have increased from $274 million to $360 million. However most of that growth occurred during 2000.

For the past two years assets held have gone sideways as new money into the system has struggled to keep pace with the declining asset values particularly in the equity market.

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