Pension funds account for nearly half (42%) of all investor capital entering the hedge fund industry globally, with the majority (65%) of these investors based in North America. As of December 2016, Preqin’s Hedge Fund Online tracked 776 North America-based pension funds actively investing in hedge funds, a rise of 3.5% from the previous year.
Despite this encouraging growth, the past few years have witnessed investors opting to divest from their hedge fund portfolios. Just under half (47%) of North America-based investors surveyed in December 2016 stated that they had issued a redemption request, with 43% of these investors citing underperformance as a key factor in this decision.
Some of the more prominent pension funds to issue redemption requests in recent years include California Public Employees' Retirement System (CalPERS), which drew attention worldwide after its decision in September 2014 to exit from the hedge fund space entirely. In April 2016, New York City Employees' Retirement System (NYCERS) followed suit, while later in 2016 New Jersey State Investment Council announced plans to halve its target allocation from 12.5% to 6%.
Seventy-one percent of North America-based investors surveyed in December 2016 for Preqin’s Investor Outlook: Alternative Assets, H1 2017 expressed their intention to either maintain or increase their hedge fund allocation in the next 12 months. Although the remainder will look to decrease their allocation, appetite for hedge funds among North America-based institutions remains strong.
California-based Intel Corporation Pension Plans, which has a 20% allocation to hedge funds, will look to commit capital to new and existing managers in 2017. Meanwhile Toronto Transit Commission Pension Society will look to invest opportunistically in hedge funds in the next 12 months, targeting both single- and multi-manager vehicles.
As shown in the tables above, CPP Investment Board is currently regarded as the largest public pension fund investor in hedge funds, with a $14.4bn allocation to the asset class, while Boeing Company Pension Fund commits the greatest amount ($5.5bn) of capital to hedge funds of any private sector pension fund. Interestingly, since the beginning of 2016, Regents of the University of California more than doubled its allocation to hedge funds: the investor currently commits $10.9bn to the asset class, up $6bn as of Q4 2015, a sign that some pension fund investors remain undeterred by the recent high-profile divestments from the asset class.
As previously mentioned, many investors interviewed by Preqin cited performance as a key reason behind redemptions. However, hedge fund performance has improved in the past year: the 12-month return of the Preqin All-Strategies Hedge Fund benchmark sits at 13.60% as at February 2017, one of the highest 12-month returns on record, as discussed in March’s Hedge Fund Spotlight.
Furthermore, the Preqin North America Hedge Fund benchmark recorded the highest return (+10.59%) of any top-level region in 2016, over three percentage points higher than the wider industry (+7.40%); this is a positive sign for the North American pension fund universe given that four in five have indicated a preference for investing in their domestic market. The North America benchmark has started well in 2017, generating returns of 2.24% over the course of the first two months of the year, a stark contrast to the -3.63% loss in the same period of 2016.
With many North America-based pension funds looking to allocate to hedge funds in 2017 and new investors entering the asset class, such as San Francisco Employees’ Retirement System which made its maiden hedge fund allocation of $1bn in 2016, this crucial group of institutions look set for an active year in the hedge fund space.