Returns of the hedge fund portfolios of large U.S. public pension plans trounced industry and internal benchmarks for the year ended June 30.
Hedge fund returns of large pension funds averaged 11% for the period, handily outperforming the 9.1% return of the HFRI Fund Weighted Composite index, which tracks single and multistrategy hedge funds, and the 4.7% return of the HFRI Fund of Funds Weighted Composite index, which tracks hedge funds of funds.
The public plan hedge fund portfolios, which ranged in size from $5.5 billion to $1.2 billion, also easily beat their internal benchmarks. Benchmark returns of the eight funds ranged from 0.56% to 8% for the year ended June 30. The average policy benchmark return was 4.3%.
The statistics came from Pensions & Investments' first-ever analysis of hedge fund performance of some of the largest public fund investors in the asset class.
Overall fund returns also were higher than hedge fund portfolio returns for seven of the funds. The only exception was the Public School Employees' Retirement System of Pennsylvania, Harrisburg, where the hedge fund portfolio returned 15.6% and the entire fund returned 14.5%.
Hedge fund specialist consultants said the average returns masked the wide variance of one-year returns, which ranged from nearly 16% for a portfolio entirely invested directly in single and multistrategy hedge funds to 7% for a portfolio invested solely in hedge funds of funds.
“There was tremendous dispersion in the returns in this universe, much greater than you would expect,” said Stephen L. Nesbitt, CEO of alternative investment consultant Cliffwater LLC, Marina del Rey, Calif. He noted the P&I data suggest that “direct investment programs did much better” than funds of funds.
The $5.1 billion hedge fund portfolio of the Pennsylvania school employees fund was the top performer on P&I's list with a 15.6% return for the year ended June 30, 170 basis points higher than its nearest competitor. PPSERS is a relative newcomer to hedge funds; its first investments were made March 31, 2009.
The system had $45.9 billion in total assets as of June 30; the fund returned 14.5% for the year.
Its one-year return was generated by 12 single and multistrategy hedge funds. It not only outperformed the HFRI Fund Weighted Composite index, but also was nearly double the fund's 8% annualized policy benchmark.
The diversification and volatility control provided by the hedge fund allocation was just as important as performance, James Grossman, director external markets, risk and compliance at Pennsylvania schools, said in an interview.
“One of our objectives was to find managers that offered returns uncorrelated to other asset classes in our portfolio. We really built the program to diversify risk in our portfolio, especially equity risk,” Mr. Grossman said.
He said the portfolio succeeded at controlling volatility, coming in well below the 8% annualized target since inception set by the staff. “The most important thing was to contain risk and that means that if equity markets are up 40%, I don't anticipate that this portfolio would rise as much, but it also won't go down as much when equity markets fall,” he added.