Although investment in hedge funds of funds by defined benefit plans in the top 200 rose 7.8% to $35.8 billion in the year ended Sept. 30, growth over the five-year period was minimal at 1.7%, evidence of the overwhelming trend toward direct investment by large U.S. pension funds.
Investment in single and multistrategy hedge funds rose 25.6% to $98.9 billion in the year ended Sept. 30, representing growth of 117.8% over the five-year period.
Commensurate with that growth in dollar terms is the widening chasm between direct and funds-of-funds investment in P&I's Top 200 universe.
In 2008, direct investments in hedge funds represented 56.3% of total hedge fund assets; as of Sept. 30, 2012, that proportion had risen to 73.4%.
“It's so clear that all of the real growth over five years has come from direct investment in hedge funds,” said J. Keith Mote Jr., managing director and an investment consultant at Pavilion Advisory Group Inc., Chicago.
“That said, it's remarkable to me that P&I's data show that aggregate hedge fund and hedge funds of funds still represent only 2.6% of the total $5.2 trillion of defined benefit plan assets in the universe. As much activity as there has been in the past year, hedge funds are such a small piece of the aggregate asset allocation; 2.6% is barely enough to move the needle,” Mr. Mote said.
“The allocation could be four times that size: 10% is a very reasonable allocation for large pension funds like these,” he added.
The largest hedge fund investor in P&I's ranking, Teacher Retirement System of the State of Texas, Austin, jumped to first place after more than doubling its hedge fund assets to $9.66 billion. All of the Texas fund's assets were directly invested in hedge funds, as was the $6.86 billion invested by Pennsylvania Public School Employees' Retirement System, Harrisburg.
The next three U.S. defined benefit plans on P&I's ranking by total hedge fund assets each had a substantial amount invested in both hedge funds and hedge funds of funds:
- New Jersey Division of Investment, Trenton, with $3.975 billion invested directly and $1.882 billion in funds of funds;
- California Public Employees' Retirement System, Sacramento, with $3.563 billion invested directly and $1.53 billion in funds of funds; and
- Boeing Co., Chicago, with $3.903 billion invested directly and $1.122 billion in funds of funds.
The hedge fund and funds-of-funds assets of most of P&I's top 200 pension funds increased in the year ended Sept. 30, with a few exceptions. One of those was the 4% drop in CalPERS' total hedge fund investment. Another exception was Target Corp., where total assets fell 50.1% to $24.1 million (all directly invested) after the fund dropped all $21 million in hedge funds-of-funds assets. Northrup Grumman Corp. also reported a 33.3% decline in hedge funds-of-funds assets to $1 billion.
A few new hedge fund investors appeared in P&I's 2012 survey, investing significant money directly in single and multistrategy hedge funds and in hedge funds of funds:
- Cook County Retirement Board, Chicago, made its first hedge funds of funds investment of $674 million last February;
- Employees Retirement System of Texas, Austin, directly invested $300 million, the first part of a planned $1.158 billion allocation to hedge funds, or 5% of total assets; and
- Los Angeles County Employees' Retirement Association, Pasa-dena, Calif., made its first investment of $250 million in hedge funds of funds in October 2011.