Investment in alternative strategies by large defined benefit plans continued at a steady pace, increasing 12% to $167 billion in the 12 months ended Sept. 30.
While the $29.9 billion reported in hedge funds was dwarfed by the $96.6 billion in private equity investments, hedge funds made up for it with the sheer velocity of growth. Despite lackluster returns in hedge funds overall, cresting around 3%, assets in hedge funds from defined benefit plans in Pensions & Investments' top 200 employee benefit plans increased 42%, from $21.1 billion a year earlier. By comparison, assets in private equity increased 14%, from $84.6 billion.
Nevertheless, the hedge fund growth rate represents a slight slowing from the 46.5% growth rate for the year-earlier period and the 69.4% rise for the 12 months ended Sept. 30, 2003. Even so, among the 38 large corporate and public pension plans reporting hedge fund assets, eight plans are new to the list.
Once again, more of the hedge fund dollars — $17 billion — are in fund-of-funds strategies. However, investment in direct investments grew faster than those in funds of funds, jumping 75% to $13 billion.
While early pension fund investors in hedge funds started with funds of funds, more have made the move to investing directly in hedge funds, said Stephen L. Nesbitt, chief executive officer of alternatives consultant Cliffwater LLC, Santa Monica, Calif.
"In the hedge fund area, both the net flows of capital into fund-of-funds and direct investments have increased significantly," said Mr. Nesbitt. Contributing to the increase is that pension funds are relatively new to hedge funds, so the starting point is low, he added.
There have been significant moves to hedge funds among the pension funds in the survey, with some of the largest investors making $1 billion to $2 billion allocations to hedge funds, he said.
For example, last year the $200.7 billion California Public Employees' Retirement System, Sacramento, changed its hedge fund allocation to a target range of 1% to 3% of its $130 billion global equity portfolio from a fixed allocation of 1%. This change, plus a restructuring of the portfolio, could increase the system's hedge fund investment to as much as $6.5 billion in coming years from $2.1 billion (P&I, Dec. 26.) The $26.8 billion Pennsylvania State Employees Retirement System, Harrisburg, increased its investment to $6.1 billion from $4.8 billion, including a new $684 million allocation to direct investments. The $5.5 billion San Diego County Employees Retirement Association added $1.3 billion in direct hedge fund investments this year.