July 26, 2006
How hedge funds turned the tide
It’s no news that pension funds are now increasingly looking to hedge funds to increase their investment returns. What is interesting is traditionally cautious pension funds are changing their portfolios to increase their allocation range for hedge funds. This means, they have seen the returns that hedge funds can offer them not just once or twice but over a period. And the best part is that these returns are consistently high. Much higher than what stock or bonds can offer. Add to this the fact that hedge funds have become more stable and don’t take too much risk, and you have a winning equation for pension funds.
Take for example CalPERS, the largest pension fund in the United States, which has over $210 billion worth of stock, bonds, funds, and private equity. It is now expanding its investment strategy into hedge fund managers. The fund also increased the target allocation range for hedge funds significantly, to as much as 5% of the plan’s global equities portfolio.
Until recently, funds like CalPERS invested more than 70 percent of their assets with long-short equity managers. Initially it was a good idea as hedge funds in their earlier form were volatile by nature. Returns could be very high or there could be huge losses. Compared to this, the equity market was quite stable. Of course, the returns were not phenomenal but they were consistent and that was what mattered.
However, of late hedge funds now ensure that they afford their clients with the benefit of consistency along with their high returns. And now that traditional strategies, such as equity long-short, become more crowded, the returns get diminished. All this goes to benefit the hedge fund market that increases its customer base and gets more respectability in the bargain.
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