Despite Concerns, Interest in Hedge Funds from US Public Pension Funds Remains Strong

by Yoosun Chung

  • 01 Aug 2014
  • HF

Data taken from Preqin’s Hedge Fund Investor Profiles online service shows the key role that US public pension funds play in the hedge fund industry; the 256 retirement systems in the US account for approximately 14% of the total global hedge fund assets that is invested by institutional investors. Recently there have been some large US public pension funds that have pulled back or pulled out of hedge funds completely which could lead to concerns for the industry; however, our data shows general sentiment towards hedge funds from these institutional investors remains strong. 

Foremost among those investors cutting back on hedge funds is the California Public Employees' Retirement System (CalPERS). CalPERS is planning to decrease its hedge fund allocation by 40% to $3bn by September 2014. San Diego County Employees Retirement Association (SDCERA) also announced its intentions to decrease its hedge fund exposure, dropping its target allocation from 20% to 5%. These cut backs from Californian pension schemes follows that of another California-based retirement system, Los Angeles Fire and Police Pension System (LAFPP), which decided to eliminate its hedge fund program altogether last year. As a result of the considerable cuts in hedge fund allocations, these high-profile US public pension funds are looking to other solutions. CalPERS plans to redirect the $2.5bn of its hedge fund sell-off to fixed income products and LAFPP will reallocate to lower cost asset classes. Despite these hedge fund culls from some prominent West Coast retirement plans, the majority of US public pension schemes remain committed to hedge fund investments and today Preqin records more public pension schemes investing in hedge funds than ever before. 

Two thirds of US public pension schemes made their first investment in the asset class in the six years between 2006 and 2011, as these investors turned away from the 60-40 model and began adding alternative assets to diversify their holdings and to add a source of risk-adjusted returns. In fact it is these uncorrelated and risk-adjusted returns rather than high returns that institutional investors typically seek when adding hedge funds to their portfolio. While many outside the industry perceive producing high returns to be the primary aim of hedge fund investors, a small proportion (7%) of investors actually consider it a priority according to the Investing in Hedge Funds: All About Returns? report. Going forward, US public pension funds will continue to look for uncorrelated risk-adjusted returns, and as such, these investors will remain likely to invest in hedge funds to meet their objectives over the long time frames these institutions assess their portfolios. 

Alongside more US public pension funds investing in hedge funds, we have also seen these investors committing more capital to be invested in hedge funds. According to data taken from Preqin’s Hedge Fund Investor Profiles online service, US public pension funds on average allocate approximately 8.5% of their total portfolio to hedge funds, compared to 8.2% in 2013 and 7.1% in 2012. With a mean target allocation of 9.5% across all US public pension funds, we can only expect the amount of capital these institutions invest in hedge funds to increase as they edge closer to their desired level of exposure. 

The cuts in hedge fund allocations made by a few high profile US pension schemes could lead to concerns that this important source of capital to the industry could be losing faith in hedge funds as a collective. However, Preqin’s database of 4,500 institutional investors shows that for now at least, the 250 or so US public pension schemes that invest in hedge funds remain committed to the asset class and are continuing to make their first investments and increase their allocations to these alternative assets.

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