In recent years, institutional investors (including public and corporate pensions), have increasingly relied on hedge funds to diversify their portfolios and provide reliable returns. Today, institutional investors represent 66% of the capital invested in the hedge fund industry.
Many institutions are currently working to cope with major demographic and fiscal challenges, including funding shortfalls, which impact corporate and public pensions’ abilities to fulfill their obligations. As a result, institutions are increasingly seeking ways to diversify their investment portfolios to produce reliable returns. Further, recent data found that 65% of the top 60 largest U.S. public pension funds currently invest in hedge funds. The 60 public funds analyzed allocate an average of 5.6% of investment assets to hedge funds for a total of $77.9 billion in 2013.
Pension plans use a number of asset allocation techniques and most call for a significant allocation to hedge funds and other alternative investment options over the next few years. Hedge funds are not a silver bullet for the challenges facing public pensions, but they are increasingly part of a comprehensive and responsible approach toward meeting financial obligations.