Public pensions shape insto era of hedge funds

The past four-year upsurge in the number of public pension funds investing in hedge funds is shaping the new institutional era of hedge fund management, with funds approaching the asset class for new reasons, says Preqin.

According to recent research by the alternative assets research firm – which surveyed 295 public pension funds that currently invest in hedge funds and 49 more about to make their first allocation to the asset class over the next 12 months – the number of pension funds to invest in hedge funds has increased by 50 per cent since 2007, with a fundamental shift in investor thinking also occurring at the same time.

“Public pension funds are one of the most influential groups of institutional investors active in hedge funds today. The sheer size of the public pension fund market (the top 10 largest pension fund investors in hedge funds have over $836 billion in assets under management) as well as their increasing uptake of hedge funds is shaping the new institutional era of hedge fund management,” said Amy Bensted (pictured), manager of hedge fund data at Preqin.

Public pension funds are now allocating to hedge funds for capital preservation and portfolio diversification rather than to produce outsized returns with Preqin citing the maturing of existing investors understanding of the asset class and the entry of more investors into the space as the reason for the shift.

Over the period of study, public pension funds have remained relatively stable in the levels of returns they seek from hedge funds, seeking absolute returns of 6 -7 per cent.

Preqin says this disparity is due to public pension funds allocating to other types of alternative assets such as private equity to bolster the overall performance of their holdings and often using hedge funds for diversification and stability within their alternatives portfolio.

Over a one-year time frame, public pension funds’ head funds have outperformed their annualised return expectations of 6.15 per cent by producing average returns of 9.8 per cent.

“Despite negative returns over the three-year time frame, public pension fund investors have remained relatively positive in their outlook towards the asset class and have increased their allocations in a time during which many of their high-net-worth counterparts have cut hedge funds from their portfolios,” said Bensted.

Preqin research has shown 21 of the US pension funds sampled have made hedge fund commitments to vehicles managed by Bridgewater Associates.

The firm is globally one of the largest hedge fund management companies and has $87 billion in assets in its Pure Alpha and AllWeather series of funds.

Despite a wider trend across the institutional landscape towards direct investment, Preqin research has revealed that the top five list, after Bridgewater, of hedge fund managers is heavily influence by groups which manage funds of funds.

According to Preqin, four-fifths of the public pensions funds which made their first commitments last year did so through multi-manager allocations and 70 per cent of all public pension fund investors in hedge funds have some current exposure to funds of funds.

The most popular fund managers according to Preqin are:

–          Bridgewater Associates

–          K2 Advisors 19

–          Grosvenor Capital Management

–          Pacific Alternative Asset Management

–          GAM

–          BlackRock Proprietary Alpha Strategies