U.S. pension funds with nearly a decade of hedge fund experience under their belts remain strongly committed to the asset class, and some intend to put more money there this year.
Only 13 pension plans were invested in hedge funds in 2001 — the first year Pensions & Investments tracked allocations. Those 13 funds had a total of $3.7 billion in the asset class that year, and all but one — Weyerhaeuser Inc., Federal Way, Wash. — added a considerable amount to their allocations since then. Some plans that ran large portable alpha programs that relied on hedge funds as the alpha engine are scaling down from previous high allocations to more moderate targets.
By 2009, U.S. pension fund investment in hedge funds grew to $84 billion — and that's just counting the 60-odd pension funds among the 1,000 largest U.S. plans with at least $250 million in the asset class as of Sept. 30, according to data from P&I's annual survey of U.S. pension funds and from annual reports.
(For a multiyear ranking of U.S. pension funds invested at least $250 million in hedge funds, go to www.pionline.com/hfinvestors.)
Some 24 plans have at least $1 billion hedge fund allocations now, but few approached even $500 million in 2001.
The $43 billion pension fund of General Electric Co., Stamford, Conn., had $1 billion in hedge fund assets as of Sept. 30, 2001, the largest hedge fund allocation that year. GE's hedge fund assets had grown to $2.1 billion as of Sept. 30, 2009.
The Teacher Retirement System of Texas, Austin, had the next largest hedge fund allocation in 2001, with $647 million. TRS began investing in hedge funds in 2000 with $53 million, spokeswoman Juliana Fernandez Helton said in an e-mail response to questions. As of Sept. 30, 2009, the $98 billion Texas fund had $3.5 billion in hedge funds; as of Dec. 31, assets jumped to $3.7 billion.
Weyerhaeuser probably had the largest allocation to hedge funds among all U.S. pension plans in 2001, with assets around $1.5 billion, but data were not publicly disclosed that year.
Weyerhaeuser began investing in hedge funds in 1985 and was one the earliest institutional investors in the asset class and maintained unusually high hedge fund allocations back in the early 2000s..
Weyerhaeuser officials, including Salim Shariff, managing director and chief investment officer of defined benefit plans, continue to abide by the company's policy of not talking about pension fund investments.
But Weyerhaeuser's subsequent annual reports disclosed pension plan allocations to hedge funds. According to that data, allocations have ranged from 31.2% of defined benefit plan assets as of Dec. 31, 2003, to 61.5% as of Dec. 31, 2007. The $4.2 billion plan's hedge fund allocation was $2.3 billion, or 55.9% of total assets as of Dec. 31.
Performance was the primary driver of explosive growth in both the number of institutional investors and the size of assets invested over the period.
Hedge funds “were the best or close to the best performing asset class over the (10-year) period, which was such a horrible period for equities,” said Erik Knutzen, chief investment officer at consultant NEPC LLC, Cambridge, Mass.
Hedge funds were indeed the best-performing asset class tracked by the Wilshire Cooperative Universe, a collaboration between Wilshire Associates Inc. and more than 60 other independent consulting firms, which aggregates pension fund client performance data.
The median hedge fund return of pension plans in the Wilshire Cooperative universe for the 10 years ended March 31 was 9.95%, much higher than the 6.34% median return of fixed income, the 5.24% return of real estate, the 2.99% return of international equity and the 2.97% return of domestic equities, according to annualized multiyear data from the universe provided by R. Brian Johnson, senior associate at Santa Monica, Calif.-based Wilshire.
Several veteran hedge fund investors said performance met or exceeded their expectations since the inception of their hedge fund programs.
Performance of the Texas Teachers fund from 2001 through 2009 was a cumulative 48.9%, or 4.5% annualized, wrote Ms. Helton in her e-mail.
The $23.8 billion Pennsylvania State Employees Retirement System, Harrisburg, saw a 4.8% annualized composite return from funds of funds between 2002 and 2009, Robert R. Gentzel, director of communications and policy, said in an e-mail. PennSERS began investing in hedge funds in 1999.
That is “a pretty decent return, in line with expectations and certainly better than the 1.6% return of the S&P 500 (index) over the same period,” Mr. Gentzel said.
PennSERS had $340 million in hedge fund investments on Sept. 30, 2001; as of Dec. 31, 2009, the allocation was $5.6 billion.