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The International Organisation of Pension Supervisors released a set of good practices relating to the risk management of alternative investments by pension funds. The document is directed at pension supervisory authorities to aid them in their assessment of whether the pension funds under their jurisdiction are managing their alternative investments adequately.
The increasing use of alternative investment forms, such as (funds of) hedge funds and private equity, are developments pension fund supervisory authorities should be alert to, IOPS states. As pension entities are placing a share of their capital in these types of instrument, the potential risks flowing from these products justify specific attention from supervisory authorities.
Pension fund supervisory authorities recognize that riskier strategies are often inherent in alternative investments, given they were initially designed for high-net worth individuals, IOPS writes. Such investments (…) require careful scrutiny and analysis, and in many cases, more rigorous review and monitoring than most traditional products, it continues.
The supervisory efforts with respect to the risk management for alternative investments should be concentrated in those areas where problems are most likely to occur and the impact of problems is most likely to be extensive. A limited allocation to alternative investments should not automatically be associated with a substantial increase in the risk profile – indeed ‘traditional’ investment forms may carry a similar or even a higher risk.