22Hedge Funds and PensionsContentsTable of Contents:OverviewHedge funds originated as an investment vehicle to helpdiversify portfolios, manage risk, and produce reliablereturns over time. While hedge funds’ investor base hasevolved though the years – from individuals to institutionssuch as pension plans, universities, and foundations –their core goals have not.Institutions face mounting challenges toward meeting theirfinancial obligations. Pension plans, in particular, facedemographic challenges resulting in a funding shortfall.As a result, pension plans have shifted investmentstrategies in recent years to alternative investments -including hedge funds - which have helped placeinstitutions on firmer ground over the long-term. Thispresentation details the growing partnerships betweenhedge funds and public and corporate pension plans.Overview 3Why Institutions Invest with Hedge Funds 4• Public and State Pension Plans 5• Corporate Pension Plans 7• University Endowments 9• Foundations 10
33Hedge Funds and PensionsHedge funds’ investor base has evolved significantlyover the years, with 65% of assets under managementcurrently coming from institutional investors such aspensions, endowments, and foundations.Many institutions are currently working to cope withmajor demographic and fiscal challenges, includingfunding shortfalls, which impact corporate and publicpensions’ abilities to fulfill their funding obligations. Asa result, institutions are increasingly seeking ways todiversify their investment portfolios to produce reliablereturns.*Source: Preqin Special Report: Hedge Funds October 2012, pp. 16OverviewFACT: 65% of hedge fund assets areheld by institutional investors.
44Hedge Funds and PensionsWhy Institutions Invest with Hedge FundsSample Corporate Pension Asset Allocation Table:Pension funds have realized that a simplemix of stocks and bonds will no longerprovide the returns required to meet theirobligations to pensioners.This reality has produced an industryevolution that has led to more pensionsinvesting in allocations and thereby growingthe universe of individuals who benefit fromhedge fund investments.
55Hedge Funds and PensionsPublic and State Pensions Invest in Hedge FundsPublic and state employee pension plans offer retirement security for millions of workers,retirees, and their families nationwide. These pension plans have increasingly partnered withhedge funds to help diversify their investments and help to provide economic security to theirbeneficiaries.*Source: The Changing Role of Hedge Funds in the Global Economy, Everett Ehrlich, pp. 1 (September, 2011)A recent study estimated that amodest allocation to hedge fundscould improve returns of U.S.public pension plans byapproximately $13.67 billionannually.*
66Hedge Funds and PensionsPublic Pensions Invest in Hedge FundsHedge funds’ investor base in the U.S. at thestate and public plan level is diverse.Investors in hedge funds range from unionssuch as AFL-CIO to local retirement plans inLouisiana to teachers in Illinois.Examples of public pension plans investing in hedge funds include:*Sources: ¹Preqin Special Report: Hedge Funds October 2012, pp. 16Public pension funds are one of the mostprominent groups of institutional investorsallocating investments to hedge funds. Publicpensions currently represent over 20% of allinstitutional capital invested in hedge funds. *The number of public pension funds investing inhedge funds in the U.S. alone has increasedsigniﬁcantly over the past ﬁve years from 196known to be allocating to hedge funds in 2007 toapproximately 377 today. *
777Hedge Funds and PensionsCorporate Pensions Invest in Hedge FundsExamples of Corporate Pension plans investing in hedge funds include:Many of the largest employers in the U.S.view hedge funds as an essential tool intheir investment toolbox in their efforts toprovide reliable, risk adjusted returns thatenable their plans to pay the retirementbenefits to millions of Americans.
888Hedge Funds and PensionsCorporate Pensions Invest in Hedge FundsCorporate pension plans investing in hedge funds include:The partnership between hedge funds and corporate pension plans hascontinued to expand in recent years.Studies indicate corporate plans are looking to increase theirallocations to hedge funds in the coming years as well. According to theOctober 2012 Preqin Report, 16% of institutional investor capital inhedge funds is currently held by private sector pension funds.Preqin Special Report: Hedge Funds October 2012, pp. 16, figure 29.Source:
9Hedge Funds and PensionsUniversity & College Endowments Invest in Hedge FundsUniversity and college endowmentswere among the first institutions topartner with hedge funds in the early1990’s, and this relationship hasstrengthened in recent years.A recent study estimated that a modestallocation to hedge funds could improve returnsof U.S. college and university endowments byapproximately $1.73 billion annually.*Endowments investing in hedge funds include:*Source: The Changing Role of Hedge Funds in the Global Economy, Everett Ehrlich, pp. 1 (September, 2011)
1010Who Invests in Hedge Funds?Foundations and Non-Profit Organizations Invest in Hedge FundsNon-profit foundations and charitable organizations around the world partner with hedge funds to helpestablish the financial resources needed to fund critical projects in local communities.For example, The Nobel Foundation recently announced plans to invest more money in hedge funds toboost returns to restore the award to its previous size after having to reduce its cash prize by 20% in 2012.Here are additional, specific examples of types of Foundations that have benefitted from their investment in thehedge fund community:Source: Nobel Prize to Get Hedge Fund Boost After Awards Sink 20%, Bloomberg News, December 2012.
11SummaryThe partnership between hedge funds andpensions continues to grow. Pension funds areseeking reliable returns and diversified portfolios,with many plans increasing existing allocationswith hedge funds. These plans use a variety ofasset allocation techniques and most call for asignificant allocation to hedge funds and otheralternative investment options over the next fewyears.Hedge funds are not a silver bullet for thechallenges facing public pensions, but they areincreasingly part of a comprehensive andresponsible approach toward meeting financialobligations.Hedge Funds and Pensions