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Milken panelists foresee a hedge fund shakeout, question U.S. plans’ direct capabilities

Few of the 10,000 hedge funds are producing solid results for institutional investors and a shakeout will occur, said panelists speaking at an asset management outlook Tuesday at the Milken Global Conference in Beverly Hills, Calif.

David Druley, chairman and CEO of consultant Cambridge Associates, said only 100 to 200 of the 10,000 hedge funds available to institutional investors have been producing “solid returns.”

Another panelist, David Hunt, president and CEO of PGIM, agreed that only a few managers have had strong returns and said that weak performers will eventually be forced to close up operations.

“We are going to see less hedge funds,” he said.

Another topic discussed by the panel was the growth in pension plan investments in illiquid investments and whether U.S. public plans could develop the expertise of their Canadian counterparts in pulling off direct investment and or in picking an alternatives fund with a strong yield.

Ron Mock, president and CEO of the C$175.6 billion ($128.6 billion) Ontario Teachers' Pension Plan, Toronto, which is known for its large direct investment program, said the plan owns five airports in Europe, but the staff expertise to make and manage such investments is “completely different” than managing an algorithmic trading portfolio, and involves hiring highly trained and paid specialists.

Panelists said U.S. public pension plans are trying to build up investments in private equity, real estate and infrastructure to counter a lower return environment for equity and fixed income, but don't have the expertise necessary staff-wise.

Mr. Mock said illiquid investments must be made with the view of long-term returns and must take in complex equations, such as, for example, how Brexit will affect the three airports the Canadian plan owns in England.

Some investments can be surer than others long term, he said, noting that the Canadian plan is the owner of one of the largest funeral chains in France. “People will still be dying 10 to 15 years from now,” he said.