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.