General Motors Co. has become the largest U.S. pension fund investor in hedge funds — and possibly the biggest in the world — after nearly doubling its allocation during the past five years.
Detroit-based GM's $87.8 billion defined benefit plan increased hedge fund investments to $11.9 billion as of Sept. 30, up from $6 billion as of Sept. 30, 2006.
“GM Asset Management's increased allocation toward hedge funds in recent years has lowered the risk exposure of our pension plans, while delivering solid returns. That approach is consistent with our goals to lower GM's risk profile, strengthen our balance sheet and fully fund our pension plans,” Walter Borst, General Motors Asset Management's CEO, president and chief investment officer, said in an e-mailed statement.
The information about GM's pension assets comes from Pensions & Investments' annual survey of the largest U.S. retirement plans. GM, which ranks seventh overall, is the largest corporate plan in the Top 200.
GM's hedge fund assets were more than double those of the second-largest hedge fund investor: the California Public Employees' Retirement System, Sacramento, which had $5.4 billion in hedge funds as of Sept. 30.
As of Sept. 30, GM's hedge fund investments represented 13.5% of its total defined benefit plan assets, nearly double the 7% average allocation to hedge funds of corporate defined benefit plans in P&I's survey.
Hedge fund assets represented just 6% of GM's defined benefit plan investments as of Sept. 30, 2006, the last time the company provided that information to P&I.
General Motors' 2010 hedge fund allocation is “significantly larger” than the 5.1% average allocation that Greenwich Associates LLC, Stamford, Conn., found in its annual survey of U.S. corporate defined benefit plans, said Goran Hagegard, principal. Data in the as-yet unreleased Greenwich survey are primarily from June 30.
Like many experienced institutional hedge fund investors, investment staffers at New York-based GMAM manage the vast majority of the portfolio — 97%, or $11.5 billion — in direct hedge fund investments. Just $357 million is managed by external hedge fund-of-fund managers.
The large proportion of direct investments is a legacy of GMAM's days as an independent money manager, which ran assets for other pension funds. The firm reverted to in-house management for GM only on Sept. 1.
Over the years, GMAM investment staff, led by John Stevens, managing director, absolute-return strategies, created and managed a large internal commingled hedge fund of funds, selecting the underlying hedge funds and controlling strategy weightings.
General Motors executives were reluctant to discuss specifics of the defined benefit plan. Mr. Borst declined to be interviewed, and GM spokeswoman Renee Rashid-Merem declined to provide further clarification about GM's pension investments.
But it's clear that GM's $5.9 billion increase in its hedge fund allocation was one part of a wide effort to reduce risk and better manage the assets and liabilities of the defined benefit plan that began toward the end of 2003.
W. Allen Reed, former president and CEO of GMAM, hinted at the end of 2003 that a new asset allocation was coming for GM's pension plan that reduced equity exposure, kept international equities and global bonds at existing levels and significantly increased allocations to real estate, hedge funds and other alternatives in order to reduce volatility and increase portfolio diversification.
In a 2007 interview, Nancy Everett, who succeeded Mr. Reed and preceded Mr. Borst, said the makeover of GM's defined benefit plan included a liability-driven investment framework in place in 2003.
Part of that move to LDI included a 20 percentage-point increase in fixed-income investments to 52% in 2006. At about the same time, GMAM was steadily increasing its hedge fund exposure in a quest for risk-adjusted returns that protected better against volatility.
Sources said GM's pension fund now reflects a sophisticated, mature portfolio that meets the objectives of investment staff. The allocation as of Sept. 30 was: domestic equities, 11.3%; international equities, 14.2%; global equity, 1.9%; domestic fixed income, 36.3%; global/international fixed income, 9.5%; private equity, 6.9%; equity real estate, 5.7%; hedge funds, 13.5%; and 0.7% other alternatives.
Many corporate U.S. defined benefit plan executives are “focused on controlling volatility and marking assets to market values and are placing that discussion within an LDI context,” said Greenwich's Mr. Hagegard.
“But these plans can't really be in an LDI context if their funding ratio is 83%. They need to wait until they are back up to about 110%. That means that protection of the corpus — a clear de-risking — is going on among corporate pension plans, and hedge funds have played a very important part in this process by providing equitylike returns with fixed-incomelike risk. Hedge funds protected the downside of many corporate defined benefit plans throughout the market crisis and its aftermath, which is the most important thing to many of these plan sponsors,” Mr. Hagegard added.