Huge increase in private equity and hedge fund investments
By Eti Aflalo
Institutional investors that manage the public's pension savings have drasticly increased their investments in private equity investment funds in general, and hedge funds in particular. In 2002, the total exposure of institutional investors to all of these funds was only about half-a-billion shekels. But within four years, by the end of 2007, NIS 13.9 billion of our pension savings were now invested in such funds. Of this sum, NIS 7.5 billion is in hedge funds. All the figures are from research conducted by the Finance Ministry's Capital Markets, Insurance and Savings Division.
According to treasury's statistics, in 2004 and 2005 Israeli institutional investors had no money at all in hedge funds. As for private equity funds, the numbers rose ten-fold from 0.2% of the public's pension savings in 2004 to 2% in 2007.
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The biggest changes came from the insurance companies. NIS 6 billion of the total investments come from so-called "managers insurance policies," which are whole life insurance policies participating in profits. In this case the policies may share in the profits, but they also share the risk, which comes to 6.2% of the total portfolio in these private equity investments.
Most of these private fund investments, a full 75%, are in foreign funds. Usually the investments are made directly through the overseas brokers, as is common in most foreign markets. According to the treasury's research, for years private investors with high net worth were the dominant investors in hedge funds. Sixty-two percent of all the investments in hedge funds in 1996 came from wealthy private individuals, while in 2005 their share dropped to 44%.
According to the treasury, the reasons for the institutional investors' growing exposure to private equity funds are actually desirable, as it improves the diversification of their portfolios and reduces risk. But it is very hard for the customers to estimate the complexity of the investments in hedge funds, and it is certainly questionable whether the investment managers of these institutional investors should expose these pension savings to such private funds.
No supervision and no transparency
The increased exposure of the public's pension savings to such funds raises a number of questions. Hedge funds are not regulated and operate with a serious lack of transparency. All this exposes the consumer to operational risks and increases the possibility of pension savings becoming the victim of manipulation or fraud.
In addition, some of the funds have very high exit fees, or waiting periods when the money may not be withdrawn - all of which may possibly become a real problem in days of financial crisis.
Another problem arises from the way hedge funds measure their returns. For example a number of such funds do not publish negative returns, and it can be very difficult to compare investments, as well as in estimating the true riskiness of hedge funds.
The treasury praised the exposure of Israeli markets to investments in such funds. However, such exposure increases the need for increased transparency and full disclosure, since investment funds are not supervised by authorities, the treasury stated.
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