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US Public Pension Funds Continuing to Increase Hedge Fund Exposure – March 2013

by Graeme Terry

  • 18 Mar 2013
  • HF

Public pension funds are an important investor group in the institutional hedge fund universe and this group currently accounts for more than 20% of all institutional capital invested in hedge funds. Previous Preqin research in February 2012 indicated that US public pensions were looking to increase their hedge fund exposure and this trend has continued into 2013. Preqin's Hedge Fund Investor Profiles database currently contains profiles for 274 US pension funds that are investing or are actively considering investing in hedge funds.

The mean current hedge fund allocation of public pension plans based in the US is 8.2%, which is a 1% increase on the 7.2% average allocation in February 2012. The current mean target allocation among these investors is 9.5%, suggesting that there is scope for these pension funds to invest even further in hedge funds over the coming year. Kern County Employees' Retirement Association plans to commit more than $200mn to new hedge fund investments in 2013 as it builds out its direct hedge fund portfolio as part of plans to increase its hedge fund exposure to 10% of total assets under management.

Investing via funds of hedge funds remains the most common structural preference for US public pensions with 58% investing solely through multi-manager vehicles, compared with 16% that invest directly and 27% that use a combination of the two methods. There has been a trend in recent years of the larger pension funds, such as Colorado Fire and Police Pension Association, moving away from funds of hedge funds in favour of direct investments, but multi-manager funds remain a common choice for new and less established investors in the hedge fund asset class. Long/short equity is the most utilized hedge fund strategy with 62% of active US public pensions indicating this as a preference. Other common strategies include macro, with 58% of US public pension indicating this as a preference, multi-strategy (58%), managed futures/CTA (46%) and event driven (42%).

Public pension funds in the US have been steadily increasing their exposure to hedge funds in recent years in order to increase the expected return on their investments, meet their actuarial return assumptions and reduce their unfunded liability. This trend is likely to continue in 2013 with a number of pension funds announcing plans to increase their exposure to the asset class. However, Anne Arundel County Retirement System has recently redeemed from the hedge fund asset class, showing that some pension funds are still unconvinced about the benefits of hedge funds. Overall though the outlook among this investor group is positive and these investors are likely to be a key source of institutional capital for hedge fund managers in 2013 and beyond.

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