Jack M. Marco, chairman of Marco Consulting Group, Chicago, said 15 of Marco's 20 clients with more than $1 billion in assets use hedge funds of funds, up from none five years ago. Their average allocation is 5.1%, he said. That translates into $3.2 billion of his clients' money going into hedge funds, with another $178 million committed this year but not yet funded, he said.
On the private equity front, 15 clients have made commitments of 5%, although actual drawdowns have come to 1.7% on average, Mr. Marco noted. To accelerate that flow, many clients over the past year have boosted their commitments to private equity to between 7% and 10% of total assets, he said.
In the last year, Marco's clients have put about $450 million in portable alpha strategies, with another $300 million committed but not yet funded, Mr. Marco said.
Alan D. Biller, president of pension consultant Alan D. Biller & Associates Inc., Menlo Park, Calif., said he's seen a particularly strong interest among unions in global tactical asset allocation over the past year, interesting because GTAA is a relatively difficult strategy for any client to become comfortable with. Mr. Biller said by the end of this year, he'll have five union clients with a combined $2.6 billion in GTAA, up from just one a year ago. Another eight clients are seriously considering the strategy, he said.
The anecdotal evidence suggests the meager single-digit returns expected from U.S. equities and fixed income are pressuring Taft-Hartley funds to close the diversification gap with corporate and public funds.
"There's huge pressure on funds to get increased returns without sacrificing the stability of those returns, and it's impossible to do that without looking at alternatives," said NEPC's Mr. Elliot.
Lawrence H. Marino, a senior vice president with New York-based pension consultant Segal Advisors Inc., pointed to skimpy fixed-income returns of 4% to 5% as the main driver prompting his firm's bigger union clients to put 5% to 7.5% of their assets in strategies such as hedge funds of funds and private equity today, up from nothing three years ago.
For trustees of the $2.6 billion National Automatic Sprinkler Industry Local 669 pension fund, Landover, Md., it was a matter of sitting back and asking, "How are we going to generate returns," said Brad Karbowski, chairman.
In conjunction with Marco Consulting, trustees set an asset allocation target of 60% equities, 20% bonds, 10% real estate and 10% alternative strategies, with half already in hedge funds of funds, and the other half slated to be put into portable alpha later this year, Mr. Karbowski said.
Consultants say the recent pickup in the pace of union money flowing into such strategies may simply be the fruit of efforts over the past few years to educate trustees.
Malcolm Auble, a trustee of the $2.3 billion Operating Engineers Local 302 plan, Seattle, another Marco Consulting client, said his fund made its first allocation to hedge funds of funds last year, after spending 18 months bringing the board up to speed on the strategy. "Jack didn't rush us into it," he said.
Operating Engineers' officials are studying portable alpha, as they continue to pursue a program of diversification that has lifted the portion of assets in strategies such as hedge funds of funds and private equity to 10% from zero in 2002, Mr. Auble said.