Are US- and Europe-Based Pension Funds Losing Faith in Hedge Funds? – September 2014

by Nat Auld

  • 29 Sep 2014
  • HF

With the recent news that CalPERS and PMT, both significant investors in hedge funds, will be exiting the asset class, it seems pertinent to determine whether these moves are outliers among pension funds based in both the US and Europe, or indicative of a wider dissatisfaction with hedge funds.

According to Preqin’s Hedge Fund Investor Profiles, US- and Europe-based pension funds tend to be smaller than the average hedge fund investor based in these regions, with average assets under management of $7.2bn compared to an average of $9.7bn for all US- and Europe-based hedge fund investors. US-and Europe-based pension funds also allocate on average 9.6% of their total assets under management to hedge funds, less than investors in these regions on the whole which typically invest on average 14.8%. However, pension funds account for the largest proportion of the hedge fund investor universe, with 24% of all hedge fund investors based in Europe or the US. Additionally, our research shows that they represent 32% of all hedge fund searches issued since the start of Q2 2014 – higher than that of any other investor type (excluding funds of hedge funds).

It is evident therefore that pension funds based in both the US and Europe continue to have a significant appetite for the asset class, with a substantial proportion looking to allocate further capital to hedge funds in the near future – including several that announced new hedge fund commitments in recent weeks. Teachers' Retirement System of the State of Illinois, for example, is looking to add two or three new hedge funds to its portfolio over the next 12 months; it plans to allocate between $150mn and $200mn to non-directional hedge fund strategies. Similarly, Employees’ Retirement System of Texas is looking to add two new hedge funds focusing on macro and CTA strategies by the end of August 2015. Wiltshire Pension Fund, based in the UK, is also looking to increase its exposure to hedge funds in the coming year. It is seeking to invest in a fund of hedge funds focusing on long/short equity strategies.

Although some pension funds seem to have lost confidence in the ability of hedge funds to prove their worth and provide sufficient returns, particularly as a justification for their relatively high fees, it would appear that this group remains a small minority. Many investors still appreciate the ability of the asset class to produce risk-adjusted returns and to perform uncorrelated to the equity markets. These are both particularly important for pension funds which tend to require significant portfolio diversification to protect their clients’ capital. Despite a small number of high-profile pension funds having recently made the decision to exit hedge funds, Preqin’s data indicates that by examining their recent activity and plans for the future, the majority of pension funds still believe the asset class can meet their portfolio objectives in the longer term.

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