But Greenwich Associates' finer dicing of the data by investor category found that even as average hedge fund allocations by U.S. public pension plans and endowments and foundations grew strongly over the period, growth of the average corporate pension plan allocation was less consistent.
The average corporate pension plan investment in hedge funds was 0.9% as of June 30, 2005, climbing to 1.2% in 2006, 1.6% in 2007, 2% in 2008 and peaking at 3.2% in 2009 — only to drop to 2.9% in 2010, according to Greenwich Associates' calculation.
Public pension plans, on the other hand, have increased their hedge fund allocations from a smaller base than corporate plans and showed stronger growth over the five-year period ended June 30, 2010, when the average allocation was 3.6% of plan assets. As of June 30, 2005, the average allocation was just 0.7%, Greenwich Associates' data showed.
Endowments and foundations started from a much higher base. They had an average hedge fund allocation of 12.3% on June 30, 2005, and an average 16.5% exposure in 2010.
“Over the last two years, there has been a meaningful increase in the allocation to fixed income by most U.S. corporate defined benefit plans. In fact, our corporate clients showed an average increase of 5% in bond investment over this time period,” said Janine Baldridge, managing director-Americas Institutional and global head of consulting and advisory services at Russell Investments, Seattle.
Ms. Baldridge said corporate fund CIOs “didn't necessarily reduce their hedge funds over this two-year period, but they had a pretty strong focus on rethinking the implications of the PPA and on (liability-driven investment) and were busy managing their interest-rate sensitivity through hedging strategies and increasing their allocation to bonds, usually at the expense of long-only equity and to some extent from alternative investments, including hedge funds.”
Once fixed-income portfolios are rebuilt to better match assets and liabilities, Ms. Baldridge said for-profit companies will shift their attention to the “returns-seeking part of their portfolio. A lot of defined benefit plans still are open, and even those that are closed to new employees will be around for a long time and absolutely require growth over time.”
Ms. Baldridge said most CIOs will think about ways to maximize the alpha generation of these growth portfolios while minimizing their biggest risk exposure — equities. The largest recipient of the flow out of long-only domestic equities will be global equities, hedge funds and private equity.
From a global perspective, public pension plans worldwide continue to increase their hedge fund allocations. Nearly 300 public pension plans across the globe now invest in hedge funds, a 51% increase over the past three years, according to new data from researcher Preqin Ltd., London.
From analysis of its database of institutional investors, Preqin researchers identified 295 government pension funds worldwide that were invested in hedge funds in the first quarter of 2011, compared with 196 plans as of Dec. 31, 2007.
The researchers flagged another 49 public plans that are planning to make their first hedge fund allocation within the next year, according to a Preqin report about its findings.
Public plans also have significantly increased their allocation to hedge funds over the period to an average 6.6% of total assets, from 3.6% as of year-end 2007.
Four-fifths of the pension plans that made first-time hedge fund investments in 2010 did so through hedge funds of funds, and 70% of all public plans Preqin analyzed have some hedge funds-of-funds investments in their portfolios.
Data from P&I's annual pension fund survey showed the enormous growth in assets invested in both hedge funds and funds of funds by the defined benefit plans among the Top 200 largest U.S. retirement plan sponsors: Aggregate assets were up 55%, to $109.7 billion in the year ended Sept. 30 (P&I, Feb. 7).
Alternative investment consultant Aoifinn Devitt said the big growth in hedge fund investment by the largest U.S. pension plans represents “the return of confidence” many investment officials felt after they saw that hedge funds performed as expected in protecting their portfolios on the downside during the financial crisis.
“The decision-making period for many institutions can be anywhere from six to 12 to 18 months, and many who were ready to invest in 2008 hesitated after the financial crash. The data from September 2010 show the results of investors finally sending their checks to hedge fund managers,” said Ms. Devitt, who is principal of Clontarf Capital, London.
P&I's data also captured the enormous growth in direct investment in hedge funds: Assets as of Sept. 30 were up 75.6% to $77.8 billion, while hedge fund-of-funds investments increased 20.8% to $31.9 billion.
Five years ago, comparatively few pension fund investment teams were ready to invest large enough sums or had sufficient internal capacity to make direct hedge fund investment feasible, said Neel Mehta, investment consultant with Towers Watson & Co. in New York.
“Over time, you've seen that far more pension plans are ready to go direct. They don't want to pay the double layer of fees that hedge funds of funds add to the equation. CIOs want a far more customized portfolio that ... fits hedge funds more holistically into the rest of their pension portfolio. They are far more focused on the separation of alpha and beta sources within their hedge fund investments,” Mr. Mehta said.