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Public Pensions Score Big With Hedge Funds
FINalternatives reports, Major Public Pensions’ Hedge Fund Portfolios Soar:
It seems some large public pension funds really know what they are doing when it comes to investing in hedge funds. According to Pensions & Investments, a sample of eight of them is easily besting the overall industry with their own hedge fund portfolios.
Those plans, with between $1.2 billion and $5.5 billion in hedge fund assets, saw their hedge funds return an average of 11% over the past year. That’s well above the performance of most hedge fund indices.
The Pennsylvania Public School Employees’ Retirement System saw its $5.1 billion hedge fund portfolio return 15.6% in the 12 months ended June 30. The New Jersey Division of Investment’s hedge funds soared 13.9% over the same period.
The Missouri State Employees’ Retirement Systems’ hedge funds rose 12.6%, those of the California Public Employees’ Retirement System rose 9.8% and the Texas Teacher Retirement System’s 7.7%.
These are impressive returns (even if it's mostly beta), and when it
comes to alternatives, I still prefer hedge funds (both internal and
external), over other less liquid alternatives (PE, RE, and
Infrastructure). These hedge fund portfolios are adding significant
value to these public pension funds, but it remains to be seen if they
can continue producing these outsized returns without taking on excess
risk.
One thing is for sure, hedge funds aren't dead, and in a
world of shrinking alpha, pension funds will still allocate to hedge
funds to capture risk-adjusted returns. As always, my only concern is
that far too many pension funds don't know what they're doing when it
comes to investing in hedge funds, and many are just paying alpha fees
for leveraged beta.
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If I recall, many of these pension funds had exposure to these same hedge funds in fiscal 2008, so the fiscal 2009 return often EXCLUDES incentive fees, as the manager spent the year trying to climb out of their high water mark hole. I also think the writer would have more credibility (some?) if it included 2008 results or 3-5 yr returns.
Hedge funds, like most asset classes, have had a difficult time making money in the last few years as all asset classes remain highly correlated and fundamental research has been secondary to momentum chasing. It just ain't easy to make it in the investment world today. The author's "spin" is a bit off.
Leo, let me ask this straight out:
Considered *in aggregate*, is there a compelling reason why pension plans shouldn't be passively indexed?
They are indexing -- that's why they have a policy portfolio (beta portfolio). They all try to add value over this portfolio mostly through investing in external managers (traditional and alternatives).
I'm aware that they use it to a large extent.
If this is the case, how come Calpers, which listed a 53/47 percent stock/bond allocation in its 2009 annual report, underperformed an unmanaged 50/50 S&P/5-yr treasury index for 8 of the last 10 years (quite badly in some cases)?
It doesn't appear that alternative investments have added anything to this fund, and have, in fact, been a substantial drag on performance.
Calpers got slammed with RE & PE, as did many other large funds. But they will argue that over a long horizon, these investments are worth it. True, but it depends where you started investing in alternatives and how you structure your portfolio to reduce risk.
Based on the data I see, it's hard to see how that would be a fact-based argument. Furthermore, they don't *have* a long time horizon.
DOW weekly chart shows key resistance around 10,700
http://stockmarket618.wordpress.com
Meanwhile, unleveraged SPY closed June 30, 2009 at 91.27 and 103.22 on June 30, 2010, for a 13.09% return. If I were a taxpayer in one of these municipalities, I'd want the answers to two questions:
- why, exactly, my fund was paying a rich premium for 209bp of underperformance?
- why, if it's going to be dumbass-long all the time, hasn't the state fired all the dead weight and detritus associated with running the fund and simply turned it over to the computers for a total cost of 5bp per year?
Never mistake brains for a bull market.
I dont care about being mistaken for brains, as long as I am in on the bull market, 'specially the one in silver juniors
Zack,
+10! Since the lows of 09, producing a good return has, for people functional in the use of charts, been like shooting fish in a barrel. Advisors and fund managers who have not produced good returns during this period are incompetent. I had managed accounts for my IRA's but have been doing my own on the long side since getting out during the approach to the lows. So far those accounts are doing better than the managed account I kept.
Secret? Common sense in trading selection and ride the bull.
Who among family and friends with big pension fund accounts did the best? TIAA-CREF
I know this won't last forever; I am looking for an long term advisor now.
If it were up to Leo, he would have all the pensions funds deep in his solar stocks!!!!!
Some pensions have wisened up and are investing in solar companies.;)
Hedge funds do better in part because they are able to leverage but by definition also take on more risk. Large pension funds also would rather hand off risk for alternate investments no matter how diversified. However, results depend on hedge fund manager and in the end we are all are subject to human frailty ,which is how we got into this problem in the first place. Bottom line is hedge funds are not the magic solution unless you believe in magic. Leo's advice is wise but does not change the fundamentals of our economic plight. Fundamental change is required !
Well put. I would add that pension funds require leverage at this point in order to produce needed returns. As a result, they are in fact taking on additional risk. There is no magic solution. It works only until it doesn't - which sounds stupid, I know - but when it does not work, they are set to get slammed. Slope of hope.
Most hedge funds have not really been hedged since the beginning of 2009. When all assets are correlated, with the possible exception of treasuries, I am doubtful there is much hedge in "hedge funds". So what you really are paying for is leveraged market timing funds. Some people are good at that, for awhile..
agreed, but you need to dumb it down a bit - you're way way way over Leo's head. He lost you at "correlated"...
Lost me? I was the one warning all the idiots that correlations among asset classes significantly increase as assets flow into alternatives. That was back in 2005 and things have not changed.