Top pension funds put 20.3% more into hedge fund strategies

Investment in hedge funds among the 200 largest U.S. retirement funds continued its meteoric trajectory, jumping 20.3% to $134.7 billion in total hedge fund and hedge funds-of-funds in the year ended Sept. 30.

The growth in hedge fund and funds-of-funds investments by defined benefit funds in Pensions & Investments' top 200 was even more remarkable over the five-year period ended Sept. 30 - 67.1% — according to data from P&I's annual survey.

The funds experiencing the largest growth in hedge fund and funds-of-funds assets in the year ended Sept. 30 included:

  • New York City Retirement Systems, New York, grew 1,104% to $1.237 billion directly invested and $437 million in funds of funds;
  • Wisconsin State Investment Board, Madison, amped up its investment into hedge funds of funds by 833.8% to $2.792 billion;
  • Teacher Retirement System of the State of Texas increased directly invested hedge fund assets by 109.7% to $9.661 billion, doubling its hedge fund allocation to 10% after receiving legislative approval;
  • Kaiser Foundation Health Plan Inc., Oakland, Calif., increased its direct investments in hedge fund by 96.8% to $1.291 billion;
  • New Mexico Educational Retirement Board, Santa Fe, showed growth of 95.6% with $624 million directly invested and $641 million in funds of funds; and
  • Ohio Public Employees Retirement System, Columbus, cranked its hedge fund investments up 87.6% with $2.115 billion of direct investments and $496 million in hedge funds of funds.

5-year growth minimal

Although investment in hedge funds of funds by defined benefit plans in the top 200 rose 7.8% to $35.8 billion in the year ended Sept. 30, growth over the five-year period was minimal at 1.7%, evidence of the overwhelming trend toward direct investment by large U.S. pension funds.

Investment in single and multistrategy hedge funds rose 25.6% to $98.9 billion in the year ended Sept. 30, representing growth of 117.8% over the five-year period.

Commensurate with that growth in dollar terms is the widening chasm between direct and funds-of-funds investment in P&I's Top 200 universe.

In 2008, direct investments in hedge funds represented 56.3% of total hedge fund assets; as of Sept. 30, 2012, that proportion had risen to 73.4%.

“It's so clear that all of the real growth over five years has come from direct investment in hedge funds,” said J. Keith Mote Jr., managing director and an investment consultant at Pavilion Advisory Group Inc., Chicago.

“That said, it's remarkable to me that P&I's data show that aggregate hedge fund and hedge funds of funds still represent only 2.6% of the total $5.2 trillion of defined benefit plan assets in the universe. As much activity as there has been in the past year, hedge funds are such a small piece of the aggregate asset allocation; 2.6% is barely enough to move the needle,” Mr. Mote said.

“The allocation could be four times that size: 10% is a very reasonable allocation for large pension funds like these,” he added.

The largest hedge fund investor in P&I's ranking, Teacher Retirement System of the State of Texas, Austin, jumped to first place after more than doubling its hedge fund assets to $9.66 billion. All of the Texas fund's assets were directly invested in hedge funds, as was the $6.86 billion invested by Pennsylvania Public School Employees' Retirement System, Harrisburg.

The next three U.S. defined benefit plans on P&I's ranking by total hedge fund assets each had a substantial amount invested in both hedge funds and hedge funds of funds:

The hedge fund and funds-of-funds assets of most of P&I's top 200 pension funds increased in the year ended Sept. 30, with a few exceptions. One of those was the 4% drop in CalPERS' total hedge fund investment. Another exception was Target Corp., where total assets fell 50.1% to $24.1 million (all directly invested) after the fund dropped all $21 million in hedge funds-of-funds assets. Northrup Grumman Corp. also reported a 33.3% decline in hedge funds-of-funds assets to $1 billion.

A few new hedge fund investors appeared in P&I's 2012 survey, investing significant money directly in single and multistrategy hedge funds and in hedge funds of funds:

  • Cook County Retirement Board, Chicago, made its first hedge funds of funds investment of $674 million last February;
  • Employees Retirement System of Texas, Austin, directly invested $300 million, the first part of a planned $1.158 billion allocation to hedge funds, or 5% of total assets; and

  • Los Angeles County Employees' Retirement Association, Pasa-dena, Calif., made its first investment of $250 million in hedge funds of funds in October 2011.

'Surprised'

“I was surprised by how many new investors put assets in hedge funds of funds in the year ended Sept. 30,” said Jeffrey M. Gabrione, director of research and a hedge fund specialist at Lowery Consulting LLC, Chicago.

“This shows that hedge funds of funds are not dead, despite how depressed most funds-of-funds managers are when you talk to them about their businesses and inflows,” Mr. Gabrione said.

Given that only 10 of the 77 defined benefit plans in the top 200 reporting hedge fund investments had declines in their hedge fund allocations during the year, Mr. Gabrione said the tenor of the institutional investor community toward hedge funds “is more positive than I would have expected,” he said.

With performance for the survey period at 5.71% for the HFRI Fund Weighted Composite index and 2.94% for the HFRI Fund of Funds Composite index, “everyone seems to be holding firm in their hedge fund investments. It will be interesting to see where everything ends up later in 2013 since it's hard to get excited about any hedge fund strategy categories so far. Nothing looks like it has much chance to spark into a performance rally soon,” Mr. Gabrione added.

This article originally appeared in the February 4, 2013 print issue as, "Top funds put 20.3% more into hedge fund strategies".