Hedge fund returns of large U.S. state pension funds continued the downward slide they began in 2015 with the performance of half of the portfolios lagging their benchmark returns for the year ended Sept. 30.
Just one of the 16 hedge fund portfolios of 13 state pension funds analyzed by Pensions & Investments produced a return higher than the leading hedge fund index, although the performance of eight portfolios was above that of the top hedge fund-of-funds index.
The lower-return trajectory of these $1 billion-plus state plan hedge fund portfolios is evidenced by median returns of P&I's universe, which have fallen 903 basis points in two years — to 0.07% as of Sept. 30, 2016, from 1.5% a year earlier and 9.1% for the 12 months ended Sept. 30, 2014.
The $1.3 billion hedge fund portfolio of the $25.6 billion Employees Retirement System of Texas, Austin, had the highest one-year return in P&I's universe — 6.2% — well above the 4.9% return of the HFRI Fund Weighted Composite index and the 0.5% return of the HFRI Fund of Funds Composite index for the same period.
Texas Employees' one-year hedge fund return was 150 basis points higher than the second-place, 4.7% return of the $2.4 billion credit-oriented hedge fund portfolio of the $70.7 billion New Jersey Retirement System, which is managed by the state Division of Investment, Trenton.
The $5.2 billion hedged equity portfolio of the $38.7 billion Public School and Education Employee Retirement Systems of Missouri, Jefferson City, took third place in P&I's ranking with a 4.5% return for the year ended Sept. 30.
The Sept. 30 one-year returns of hedge fund portfolios P&I analyzed ranged widely between Texas Employees' 6.2% return to the -0.99% return of the $2.2 billion equity-oriented hedge fund portfolio of the New Jersey state system.
But a closer look at P&I's performance ranking showed that returns of state pension hedge fund portfolios were tightly clustered and roughly are “in line with the HFRI Fund of Funds Composite (index return) for the same time period,” said Stephen L. Nesbitt, CEO of alternative investment consultant Cliffwater LLC, Marina del Rey, Calif., in an e-mail.