This Won't End Well - US Asset Managers Target Australia's $1.5 Trillion Pension Funds

Hedge funds attracted a net $44 billion in assets globally last year, the smallest amount since 2012. As these increasingly desperate funds try to change that in 2016, one enormous target has been identified in Australia.

Australia has approximately USD$1.5 trillion in retirement savings, one of the largest and fastest growing pools of pension money in the world according to the WSJ. Several US asset managers are already actively working to get a foot in the door, even though management fees charged in Australia are among the world's lowest according to local lobby group Financial Services Council.

"Everyone wants to get their hands on that pie. People think there's a lot of money to be made in Australia" said Jesse Huang, director for strategic relations Boston based hedge fund PanAgora Asset Management

Other than the potential to grow AUM, the fact that Australian funds doubled their holdings of alternative assets between 2009 and 2015 has funds salivating to set up shop.

Australian funds doubled their holdings of alternative assets—ranging from venture capital and private equity to hedge-fund investments—to an average of 8% of their portfolios between 2009 and 2015, according to Morningstar. Inflows have been especially strong over the past two years. Including infrastructure and property, Australian funds now hold about 20% of their assets outside of traditional investments such as stocks, bonds and cash.

Additionally, a recent survey by State Street showed two-thirds of Australian pension funds plan to boost their exposure to hedge funds over the next three years.

Overseas funds are putting talent on the ground because Australia is "not an easy market to enter. It's complex and highly concentrated, buyers are sophisticated and competition is fierce. Players who only come here to push product are bound to fail" said Anthony James, a partner at PwC in Sydney.

Potential clients can be tough to convince said Damian Crowley, head of distribution with Pengana Capital, a boutique Sydney fund management firm, adding that some investors "think hedge funds caused the global financial crisis." Alas, if investors have that mindset now, wait until hedge funds tie up pension funds in a bunch of high risk, highly illiquid positions just as the market sells off.

MLC, one of the largest pension funds in Australia has increased its alternative exposure by nearly 40% over the past three years, most notably to PE and energy futures, but CIO Jonathan Armitage says the A$62 billion fund is "picky."

"Our starting point is deep, deep skepticism. We make sure we only buy what we understand." Armitage said

That fact that it's a tough market to enter is not deterring some firms from moving forward however. Oaktree Capital Management, who invests in commercial mortgages and distressed debt opened up a branch in Australia in March, TIAA Global Asset Management opened a Sydney office last year, and Chicago based Northern Trust also set up a Sydney office, along with a sales team in Melbourne to offer full asset-management services to pension funds.

The shift in asset allocation undoubtedly comes from the fact that safer investment strategies are no longer an option for managers trying to generate returns, thanks to central banks going absolutely insane and driving over $10 trillion of sovereign debt into negative yields (soon to be done with corporate debt as well as Mario accelerates the global collapse to light speed with the ECBs new program).

Recall that now fixed income is yielding so little, that to earn a return of 7.5% investors would have to construct a portfolio that has nearly 3x the risk than it did in 1995. This is causing pension funds to risk even more to find yield, and thus the increased allocation to alternative assets.

Hedge funds aren't just targeting the big fish of course, retail investors are also on the radar for those looking to get into Australia.

While foreign hedge funds are eager to target big institutional investors, they are also pitching hard to retail investors—in particular the growing number of Australians, nicknamed “selfies,” who manage their own pension savings. Such investors control about a third of Australia’s retirement assets.


PanAgora, which makes money through complex trading strategies from high-speed algorithmic trading to leveraged short selling, offers one of its funds to mom-and-pop investors here in conjunction with Pengana Capital, a boutique Sydney fund-management firm. Among the more unusual data PanAgora mines to form its trading strategy: thousands of lost-baggage claims for potential signs of poor airline management.

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Ah yes, hedge funds who introduce complex trading strategies to mom and pop investors and massive pension funds - what could possibly go wrong there?