19 April 2024

Pension Funds Reducing Hedge Fund Investments

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In San Francisco, the chairman of that city’s pension fund has put on hold a vote to invest 15% of its assets in hedge funds. In Austin, Texas, officers responsible for the retirement savings of city police officers are discussing whether to withdraw all of their hedge-fund investments. In Harrisburg, Pa., a prominent state official asked the systems that manage money for teachers and other public workers to reconsider the $7.6 billion parked in such investments.

The new conversations were spurred by Calpers, the largest U.S. public pension fund, which last month decided to shed its entire $4 billion in hedge-fund investments over the next year. Calpers said the investments were too small a slice of its $298 billion portfolio to justify the time and expense they required.

So far, those talks haven’t led to widespread exits. But the concerns offer evidence that public pension funds are reconsidering their decade long pursuit of hedge funds as an alternative way of boosting long-term returns and closing funding gaps.

At stake for hedge funds is billions of dollars in investments made by public pension funds on behalf of public-sector employees. Over the past decade, pensions have increasingly moved away from stocks and bonds and put money into investments such as hedge funds, real estate and private equity as alternatives to stocks and bonds. Now, about half of the U.S. public pensions have some sort of hedge-fund investment, according to data tracker Preqin.

Hedge funds typically bet on and against stocks, bonds or other securities, often using borrowed money. That can amplify their gains and their losses. Hedge funds also charge higher fees than other money managers, usually 2% of assets under management and 20% of profits.

Average public-pension gains from hedge funds were 3.6% for the three years ended March 31, according to a review of public pensions with more than $1 billion in assets by Wilshire Trust Universe Comparison Service. That compared with a 10.9% return from private equity, a 10.6% return from stocks and 5.7% from fixed-income investments.

After peaking at 1.81% in 2011, pension allocations to hedge funds fell to 1.35% of total portfolios as of June 30, according to Wilshire.

Calpers wields hefty influence among public pensions, due in large part to its size and history as an early adopter of alternative investments to stocks and bonds. When the pension fund waded into hedge funds 14 years ago, it was among the first to do so. It is unclear where much of this money could end up, but Calpers officials have said they want to increase their commercial-real-estate investments.

Investors of all types continue to pour money into hedge funds, but there are indications they aren’t quite as enamored with big funds as they once were. The hedge-fund industry managed a record $2.82 trillion at the end of the third quarter, an increase of $18 billion, or 0.6%, from the prior quarter, according to HFR.

Investors added $15.9 billion of new capital to hedge funds in the quarter, a decline from $30.5 billion of new money in the second quarter. And for the first time since 2009, big funds saw less new money than smaller funds.

Even Calpers had some of the same internal debates about the merits of hedge funds before deciding to exit. In the years leading up to the move there was widespread disagreement about the investments. Some officials pushed to put even more money into hedge funds. Others openly doubted the ability of hedge funds to serve as a buffer during times of stress.

Click here to access the full article on The Wall Street Journal. 

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