A new report has condemned the "shocking" level of UK pension scheme investment in hedge funds.
SCM Direct condemned the “shockingly poor transparency” around costs and holdings, saying that many members would be unaware of the extent of their hedge fund investments.
The research estimated that 4.8m UK individuals are invested in hedge funds through their pension scheme. It also estimated that UK pension schemes paid around £2.85bn in fees and charges for their hedge fund investments in 2015.
But pension schemes are paying up to 36 times the amount in total fees and charges that it would cost to switch from a hedge fund to alternative low cost index funds.
The report also noted that hedge funds are more concentrated and less liquid than simpler, low cost index funds. And SCM Direct estimated that over the last five years index fund strategies could have beaten the average hedge fund return by three or four times.
But while hedge funds have “produced disappointing results for their investors, they have been extremely lucrative for their managers”.
The report said the average profit available for distribution per senior executive or fund manager of an average UK-based hedge fund was £3.26m. The average member of staff, meanwhile, had a salary of more than £250,000.
SCM Direct said a typical UK pension fund invests six per cent of its assets into hedge funds, “with many increasing their exposure in recent years, despite poor performance”.
The report said: “Based on the research findings, it is shocking that many pension funds are still increasing their hedge fund holdings."
“People’s hard earned money is being depleted in hedge funds while the managers earn millions.
“This is a travesty that the Treasury and government should be investigating and addressing with the utmost urgency.”
The report added: “It would be transformational to grant savers the basis consumer rights of knowing what their pension schemes were purchasing and their true cost, as well as reviewing the role of pension fund consultants who may be conflicted.”
Jack Inglis of the Alternative Investment Management Association disagreed, however. "As we have shown many times in our previous research the long term evidence in favour of hedge funds is very convincing," he said. "Hedge funds have significantly outperformed all other major investment types over the past 25 years and have done so with less than half the volatility and risk of the equity markets. Institutional investors as a whole are telling us that they remain committed to their hedge fund allocations."