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The P&I 1000: Hedge funds

Hedge fund investments rebound, up 5.6%

Single and multistrategy up 6.1%; fund-of-fund assets rise 3.4%

Hedge fund and hedge fund-of-funds investments of defined benefit plans among Pensions & Investments' 200 largest U.S. plan sponsors rose 5.6% to an aggregate $159.6 billion in the year ended Sept. 30.

The asset growth was good news for large corporate and public pension funds: Combined assets in hedge funds and funds of funds had fallen 6.4% to $151.1 billion in the year ended Sept. 30, 2016.

In fact, the combination of new allocations to hedge funds/funds of funds and strong investment returns as of Sept. 30 brought 2017 assets closer to the $161.4 billion invested by funds in P&I's top 200 universe as of Sept. 30, 2015.

In the 12 months ended Sept. 30, 2017, the HFRI (Hedge) Fund Weighted Composite index gained 7.1%, the HFRI Fund of Funds Composite index rose 6.5% and the HFRI Fund of Funds Conservative index was up 4.6%.

All three indexes are produced by Hedge Fund Research Inc.

The split between hedge fund and fund of funds investments in P&I's aggregate total remained unchanged at 83% and 17%, respectively, in 2017.

Investments in single and multistrategy hedge funds by the largest funds in P&I's universe rose 6.1% to $132.2 billion in the year ended Sept. 30, 2017, and hedge fund-of-funds assets rose 3.4% to $27.4 billion.

By contrast, P&I survey data as Sept. 30, 2016, showed direct investments in hedge funds fell 4.7% in the year and hedge fund-of-funds assets were down 13.7%.

The largest hedge fund investor in P&I's 2017 survey remained the Teacher Retirement System of the State of Texas, Austin, which reported a 10% increase to $11.8 billion in single and multistrategy hedge funds in the year ended Sept. 30.

Michigan Retirement System, Lansing, followed with an increase of 7.8% to $10.1 billion in hedge funds and funds of funds in the year ended Sept. 30. The Michigan system's funds-of-funds portfolio rose 12.5% to $6.1 billion and its hedge fund portfolio increased a more modest 1.5% to $4 billion.

The Virginia Retirement System, Richmond, moved up to third place, with asset growth of 13.8% to $8.7 billion in direct hedge fund investments, followed by the California State Teachers' Retirement System, West Sacramento, which increased its hedge fund investment by 221% to $7.8 billion, and the Massachusetts Pension Reserves Investment Management Board, Boston, which experienced a 12.9% increase in its mixture of hedge funds and funds of funds to $7.1 billion.

P&I's analysis of investment trends found several large, experienced hedge fund investors significantly increased their hedge fund allocations in the year ended Sept. 30. The Los Angeles Water & Power Employees' Retirement Plan reported the highest growth among the funds in P&I's universe.

The fund's hedge fund-of-funds assets increased 259% to $682 million in the year ended Sept. 30, thanks to a large allocation to Blackstone Alternative Asset Management.

CalSTRS was the second-largest increase among P&I's universe. All of its hedge fund assets were invested in trend-following managed futures trading and global macro strategies as of Sept. 30, data provided by the fund for P&I's survey show.

In an interview with P&I in September, Christopher J. Ailman, CalSTRS' chief investment officer, said the increased hedge fund allocation, including the hire of four unnamed trend-following managers, were part of the fund's new $20 billion risk-mitigation asset class.

Aggregate assets invested in managed futures/global macro hedge fund category by pension funds in P&I's top 200 universe increased nearly 50% to $22.3 billion in the year ended Sept. 30.

The Missouri State Employees' Retirement System, Jefferson City, increased its allocation to managed futures and global macro strategies by 954% to $2.1 billion in the year ended Sept. 30, data from the fund's survey showed.

Other hedge fund strategy classes tracked by P&I's survey experienced declines in the year ended Sept. 30: equity hedge, down 2.8% to $16 billion; relative value, down 6.6% to $11.3 billion; and event-driven, down 13.8% to $12.5 billion.​