Nearly three-quarters of all North American public sector pension funds invest in hedge funds. This group represents 16% of all North American investors active in hedge funds. In more recent years, changes in pension legislation has enabled public pension plans to commit to the asset class on a larger scale. North America is the hub of the industry and as such public pension funds in this region have to have access to a large range of opportunities in hedge funds. As public bodies, public pension are somewhat cautious when it comes to investing in alternatives and many of them have a relatively low allocation to hedge funds, in terms of % of AUM. However, as many pension funds are very large in terms of size, this often equates to a significant allocation in dollar amounts.
Many public sector pension funds in North America use fund of hedge funds to gain exposure to the asset class. Generally pension funds do not have the experience or resource to carry out their own due diligence and use fund of hedge funds to create a large and diversified portfolio through a single investment. This investment style also offers pension funds the opportunity to gain access to strategies and investment styles that they may not have much knowledge of. Other significant strategies for such investors are CTA and macro managers. Increasingly public pension funds invest directly into hedge funds and we expect to see more pension funds in the US allocating capital to single-manager, single-strategy hedge funds in 2010.
The majority of public sector pension funds located in North America prefer to invest in funds based in the North American region. They invest in their domestic market for reasons of convenience – many investors like to visit the managers they invest with and want to be able to contact these firms without the concerns of time delays or long-distance travel. However many of these pension funds employ North American managers to run global mandates for them, and their hedge fund investments are often diversified on a global scale.
For more information on institutional investors in hedge funds, please see Preqin's Hedge Investor Profiles.