Hedge funds are too expensive says UK rail pension fund manager

EDINBURGH, March 13 (Reuters) - Britain's railway pension scheme fund manager has moved to managing more of the assets itself, switching to "smart beta" strategies as hedge funds and other alternative investments often prove too expensive, its chief executive said on Friday.

Pension funds have become increasingly conscious of fees, as low bond yields around the world depress the returns which they need to make in order to pay their pension obligations.

Chris Hitchen, CEO of RPMI, told a pensions conference that when starting to overhaul the business two years ago the fund manager discovered that 20 percent of the assets - in hedge funds and other alternative classes like private equity - made up two-thirds of its investment costs.

"We are being much more scientific and rigorous about what we are going to get from this relationship - can we get access to those (returns) more cheaply elsewhere ?," he said.

Investors are increasingly using co-called 'smart beta' strategies, which sit between passive, or beta, and active, or alpha investment strategies. These may replicate some hedge fund approaches more cheaply.

Such products have become a magnet for investors in the |United States, pulling in 60 cents of every dollar flowing to exchange-traded funds over the last two years, according to Morningstar (NasdaqGS: MORN - news) .

High-profile pension fund exits from hedge funds over the last year include U.S. fund Calpers and Dutch pension scheme PMT, both of which cited high costs and poor performance, although broad sector flows into hedge funds are set to increase in 2015.

RPMI, which has 21 billion pounds ($31 billion) under management, was not planning to stop using alternative managers altogether, Hitchen told Reuters on the sidelines of the conference. But he said the fund would assess external managers to check it was getting good value from them.

"If we feel we aren't, we'll have to figure out whether it's worth us building up the expertise in-house."

Manny Roman, chief executive of Man Group (LSE: EMG.L - news) , the world's largest listed hedge fund manager, told Reuters on the sidelines of the conference earlier this week that for every firm that withdrew from hedge funds, 10 more put money in.

($1 = 0.6778 pounds) (Reporting by Carolyn Cohn and Nishant Kumar; Editing by Simon Jessop and Greg Mahlich)