The NSW Local Government Superannuation Scheme (LGSS) has pulled its entire allocation to hedge funds – totalling $425 million – and invested half of the redeemed capital in high-grade Australian credit.

The $5.6 billion fund put redemption requests to hedge fund-of-funds (HFoFs) run by BlackRock, Warrakirri and FRM Investment Management in recent months, disappointed by the funds’ degrees of correlation with listed markets.

To date, about half of its mandates had been returned and invested in a discrete mandate targeting high-grade Australian credit, ranging from government, corporate and synthetic debt instruments, run by Macquarie Bank.

“We went into that asset class thinking that hedge funds would be uncorrelated to sharemarkets. Not only the returns, but also the correlations, are not what they were promised to be,” Lambert said.

But the fund would not rule out future investments in hedge funds.

“This is not to say that we won’t return to that space in the future – but we wouldn’t go back to hedge FoFs.”

Lambert said the lack of transparency offered by hedge FoFs was another concern.