Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. ALTERNATIVES
April 01, 2013 01:00 AM

Big public pension funds trump hedge fund benchmarks

1,500 basis points separate the highest and lowest returns

Christine Williamson
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Michael Marcotte
    R. Stanley Rupnik, CIO of Illinois Teachers', has been careful to make direct investments in uncorrelated hedge fund strategies.

    Big public pension funds reaped strong returns from their hedge fund portfolios in 2012, with most of them handily surpassing their own benchmarks and well-used industry indexes.

    The hedge fund portfolios, for the most part, achieved close to what chief investment officers wanted, despite a 1,500-basis-point difference between the best and worst performers, according to Pensions & Investments' analysis of the returns of 19 hedge fund portfolios from 17 U.S. public retirement plans with aggregate hedge fund assets of $60.7 billion.

    Unlike P&I's typical performance ranking, being at the bottom was not necessarily a bad thing if the CIO's intent was not to capture equity market beta in 2012, when the MSCI All Country World index returned 16.9% and the Standard & Poor's 500 index came in at 16%.

    All but four of the public fund hedge fund portfolios in P&I's universe topped the one-year return of the HFRI Fund of Funds index, the benchmark most commonly used by institutional investors. Seven of 19 portfolios trailed their internal benchmarks.

    The top return for the year ended Dec. 31 was a high of 17.3% for the $300 million directional hedge fund portfolio of the $8.1 billion defined benefit plan of the Missouri State Employees' Retirement System, Jefferson City.

    The lowest was 2.3% for the $4.1 billion non-directional portfolio of the $112 billion Teacher Retirement System of Texas, Austin.

    But being smack dab in the middle of the pack is where a number of CIOs said they were glad to be.

    “We are relatively happy with our hedge fund portfolio returns. 2012 was a good year,” said Paul J. Williams, investment officer of the $19.7 billion Texas County & District Retirement System, Austin. The plan's $5.3 billion hedge fund portfolio returned 8.6% in 2012, roughly in the center of P&I's return ranking.

    That return was by intent. Mr. Williams said 5.5 percentage points of represented alpha — outperformance over the equity market return — with low beta exposure (0.2) to the MSCI ACWI.

    As to be expected in an ebullient equity market, Mr. Williams said returns from investments in strategies uncorrelated to equity markets, such as global macro and managed futures, did not contribute much to overall hedge fund portfolio performance.

    “Basically, we really got very little return from our risk-free investments in 2012,” he said.

    In the middle

    The 8.2% return of the $2 billion hedge fund portfolio of the $38.2 billion Teachers' Retirement System of the State of Illinois, Springfield, also was in the middle, mostly because fund executives have been careful to make direct investments in uncorrelated hedge fund strategies, especially credit funds, said R. Stanley Rupnik, CIO.

    The reason for the deliberateness is that the system made its first hedge fund investments in 2007 through hedge funds of funds, which “have quite a bit of equity beta exposure.” By design, the correlation to equity markets was reduced as the percentage invested directly in single strategy and multistrategy hedge funds rose to 55% as of Dec. 31, Mr. Rupnik said.

    Equity beta was the key to top performance in P&I's ranking; portfolios with less equity beta by design ranked much lower, sources said.

    Although MOSERS' directional portfolio came in at 17.3%, the system's far larger $2.2 billion non-directional hedge fund portfolio returned 6.5% for the year, placing it 15th in the return ranking. Texas Teachers' $4.5 billion directional hedge fund portfolio returned 8.2%, good for 10th place and a big jump from the 2.3% return of its non-directional portfolio.

    While Texas County & District and Illinois Teachers funds run combined directional and non-directional hedge fund portfolios, MOSERS and Texas TRS followed the trend of splitting them.

    Directional strategies invest long or short, based on the manager's prediction of future market trends. Non-directional strategies don't make market bets and tend to produce returns uncorrelated to equity and fixed-income markets.

    “At a very high level, investors can bifurcate their hedge funds into directional and non-directional categories. Internally, we split the portfolio accordingly. The returns we're aiming for depend on the purpose of each portfolio,” said Rick Dahl, CIO of MOSERS.

    “In big years for equity markets like 2012, the directional hedge fund managers tend to catch the market beta. In years when the equity markets are negative, returns of the directional and non-directional hedge fund portfolios reverse” he said.

    Non-directional strategies are included within MOSERS' alpha pool; the directional hedge fund managers are included in the plan's global equity strategy.

    Separate portfolios

    The $28.7 billion Public School Retirement System of Missouri and the $3.1 billion Missouri Public Education Employee Retirement System, sister funds managed together in Jefferson City, also have separate directional and non-directional hedge fund portfolios, said Travis Allen, investment officer.

    The public school fund's 11.6% hedge fund return edged out the public education fund's 11.4% return for the year, ranking third and fourth, respectively, in P&I's table. Mr. Allen said the hedge fund portfolio is commingled, with the minimal difference in performance due to cash flow variation.

    The shared hedge fund portfolio had 0.3 beta to the MSCI World index last year, slightly higher than the beta of the Texas County & District fund's portfolio. That was the result of deliberate “beta plays that did very well,” Mr. Allen said.

    Returns of the Public School/ Public Education funds' non-directional hedge fund portfolios, totaling $2 billion and $198 million, respectively, are included within the U.S. equity allocation, Mr. Allen said.

    The approach that MOSERS and its fellow Show-Me State pension funds use — capturing equity beta through the directional allocation when markets are running high and generating alpha from the non-directional strategies when markets are dismal — illustrates how important hedge fund portfolio structure is to producing positive returns in a variety of market conditions, said Stephen L. Nesbitt, CEO of Cliffwater LLC, Marina del Rey, Calif., a specialist alternatives investment consultant.

    'Huge difference'

    The structure of an institutional hedge fund portfolio “made a huge difference to returns in 2012, whether purposefully or by accident,” Mr. Nesbitt said.

    Two hedge fund portfolios that trailed the HFRI index return did so because their portfolios are virtually devoid of equity market exposure.

    The State of Wisconsin Investment Board, Madison, has “basically no beta” in its $1.4 billion hedge fund portfolio, which returned 4.1% in 2012, Mr. Nesbitt said. The board manages the state's defined benefit plan, which totaled $84.6 billion as of Dec. 31. The hedge fund portfolio is part of the defined benefit plan's $78.8 billion core fund.

    The $49.7 billion Pennsylvania Public School Employees' Retirement System, Harrisburg, deliberately scrubbed equity beta out of its $5.9 billion hedge fund portfolio, which returned 3.4% in 2012, spokeswoman Evelyn Tatkovski said in an e-mail.

    “The absolute-return asset allocation is used to increase diversification in the fund, focusing on strategies that are not systematically long (or short) equity, credit or interest rate exposures ... The performance of our program should not be correlated to the equity markets, providing more idiosyncratic returns,” Ms. Tatkovski said.

    Related Articles
    Big public funds outperform their hedge fund yardsticks
    Public plan hedge fund returns OK, but lag last year's
    Public funds' hedge fund returns
    IMF: U.S. public pension funds increasing risk to dangerous levels in search of…
    Illinois Teachers fund embraces directness
    MOSERS looking for auditor
    Big public funds' portfolios outperform their indexes
    Recommended for You
    Stock_Market_Bills_i.jpg
    Private lenders are offering cheaper debt than Wall Street banks
    KevinODonnell_i.jpg
    Cresset adds executive managing director of private funds group
    choi_jennifer_2017_head-main_i.jpg
    ILPA names acting CEO
    New SEC Rule on Fair Pricing Determination Needs Careful Consideration
    Sponsored Content: New SEC Rule on Fair Pricing Determination Needs Careful Consideration

    Reader Poll

    June 6, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Nearing the finish line: Ideas on end-state investing for corporate DB plans
    The Meaning of "Portfolio Intelligence"
    Credit Indices: Closing the Fixed Income Evolutionary Gap
    Forever in Style: Benchmarking with the Morningstar® Broad Style Indexes℠
    Crossroads: Politics, Inflation, & Bonds
    Is there a mid-cap gap in your DC plan?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    June 20, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit