Hedge Funds and Pensions

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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.

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Hedge Funds and Pensions

  1. 1. Hedge Funds and Pensions Managed Funds Association | January 2014
  2. 2. Overview Hedge funds originated as an investment vehicle to help diversify portfolios, manage risk, and produce reliable returns over time. While hedge funds’ investor base has evolved though the years – from individuals to institutions such as pension plans, universities, and foundations – their core goals have not. Institutions face mounting challenges toward meeting their financial obligations. Pension plans, in particular, face demographic challenges resulting in a funding shortfall. As a result, pension plans have shifted investment strategies in recent years to alternative investments - including hedge funds- which have helped place institutions on firmer ground over the long-term. This presentation details the growing partnerships between hedge funds and public and corporate pension plans. 2
  3. 3. 1 Hedge Funds and Pensions Hedge funds’ investor base has evolved significantly over the years, with 66% of assets under management currently coming from institutional investors such as pensions, endowments, and foundations.* 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 funding obligations. As a result, institutions are increasingly seeking ways to diversify their investment portfolios to produce reliable returns. FACT: 66% of hedge fund assets are held by institutional investors. *Source: 2014 Preqin Global Hedge Fund Report, January 2014 3
  4. 4. 2 Public and State Pensions Invest in Hedge Funds Public and state employee pension plans offer retirement security for millions of workers, retirees, and their families nationwide. These pension plans have increasingly partnered with hedge funds to help diversify their investments and help to provide economic security to their beneficiaries. Public pensions have strengthened their partnerships with hedge funds in recent years. 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* *Source: Morgan Stanley, 2013, based on publicly available data. 4
  5. 5. 3 Public Pensions Invest in Hedge Funds Hedge funds’ investor base in the U.S. at the state and public plan level is diverse. Investors in hedge funds range from unions such as AFL-CIO to local retirement plans in Louisiana to teachers in Illinois. Public pension funds are one of the most prominent groups of institutional investors allocating investments to hedge funds. Public pensions currently represent over 22% of all institutional capital invested in hedge funds. * From 2011 to 2012, public pensions shifted their average alternatives allocation from 20% to 24% of their overall portfolio.** *Source: 2014 Preqin Global Hedge Fund Report, January 2014 **Source: Morgan Stanley, 2013, all based on publicly available data source. 5
  6. 6. 4 Corporate Pensions Invest in Hedge Funds Many of the largest employers in the U.S. view hedge funds as an essential tool in their investment toolbox in their efforts to provide reliable, risk adjusted returns that enable their plans to pay the retirement benefits to millions of Americans. The partnership between hedge funds and corporate pension plans has continued to expand in recent years. Pension funds are seeking reliable returns and diversified portfolios, with many plans increasing existing allocations with hedge funds. These plans use a variety of asset allocation techniques and most call for a significant allocation to hedge funds and other alternative investment options over the next few years. Studies indicate corporate plans are looking to increase their allocations to hedge funds in the coming years as well. According to a Morgan Stanley 2013 report based on publicly available data sources, 56% of the top 50 largest U.S. corporate pension plans currently invest in hedge funds and allocated on average 5.9% of their assets to hedge funds for a total of $54 billion.** 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 managing risk and meeting financial obligations. *Source: “50 Largest U.S. Corporate Pension Plans’ Exposure to Hedge Funds.” Morgan Stanley, 2013. 6
  7. 7. 6 Hedge Fund Investor Map To learn more about how hedge funds help pensions provide economic security for workers, retirees, universities and non-profits in your state, click here. 7

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