US- and Europe-Based Public Pension Funds Retain Confidence in Hedge Funds – November 2015

by Nat Auld

  • 17 Nov 2015
  • HF

In 2014, several high-profile pension fund investors, including CalPERS, announced that they would be divesting their holdings in hedge funds. It was unclear at the time whether these moves were indicative of wider public pension fund dissatisfaction with hedge funds that would lead to further exits. One year on, we see that far from a withdrawal, more public pension funds are now invested in hedge funds and their average allocation to the asset class has in fact increased.

The number of US- and Europe-based public pension funds invested in hedge funds has risen notably since this time last year. The number of US-based public pension funds invested in hedge funds has risen from 270 to 287 in the US and from 68 to 87 in Europe, far from the anticipated exodus. Furthermore, the average allocation of public pension funds in each region has increased, as illustrated in in the chart below. Preqin’s Hedge Fund Investor Profiles online service indicates that Europe-based public pension funds are generally larger than those based in the US, with average assets under management (AUM) of $12.6bn, compared with $9.7bn for US-based funds. The sizeable AUM of these institutions indicates that even small increases in allocations lead to large increases in capital inflow to managers.

US- and Europe-based public pension funds continue to maintain 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. For example, Colorado Public Employees’ Retirement Association is looking to commit up to $440mn to two single-manager hedge funds over the next 12 months; it hopes to gain exposure to macro and multi-strategy relative value funds.

Many US- and Europe-based public pension funds still value the ability of the asset class to produce risk-adjusted returns and to provide returns uncorrelated to the equity markets. This is particularly important for pension funds as they tend to require significant portfolio diversification to protect their clients’ capital. Public pension funds continue to invest in hedge funds and therefore remain an important source of capital to hedge fund managers.

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