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Publishing the results of research undertaken last year, the DNB also noted that investment managers overseeing hedge funds, infrastructure and other alternatives were not always subject to regular performance reviews, nor was the risk of investment always independently assessed.
The letter, signed by head of pension fund and investment company supervision, Olaf Sleijpen, broke down the findings into four categories – investment, manager selection, monitoring and governance – with returns from alternatives specifically highlighted. "The DNB has seen that this can lead to diversification benefits being overestimated and management and specific risk characteristics, such as tail and liquidity risks, being underestimated."
The regulator said due diligence for the acquisition of illiquid assets was particularly important, examining performance, strategy and the financial, operational and legal risk of any assets. It said the process was more involved than asking a few critical questions, and suggested site visits should be undertaken to understand an asset's governance structure and risk management procedures.
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