The decision by the California Public Employee Retirement System (“CalPERS”) to divest its hedge fund program made quite a media splash in 2014 (you can read more about that here, here and here), and caused some pundits to predict the imminent decline of hedge funds. On the contrary, alternative investment data specialist Preqin says public pensions have increased their allocations to hedge funds since last year, and despite generally being later to the game than endowments and foundations, public pensions have become “major allocators of capital” to the hedge fund industry, accounting for 16% of all hedge fund investments.
According to Preqin, pension funds have increased their mean allocations to hedge funds from 7.2% in 2010 to 8.8% at present. Pensions differ with endowments, foundations, and other hedge fund investors in terms of their investment preferences, with 90% of pensions citing North America as their favorite market; with only 33% favoring Europe and 32% liking emerging markets. In terms of favorite strategies, pensions like long/short equity, multi-strategy, macro, and event-driven the best; and commodities and distressed strategies the least.
A post at the Preqin blog speculates that “public pension funds will be a major source of institutional capital in the hedge fund industry for years to come,” should their desire to reduce risk and volatility in their overall portfolios persists. Typically, investors are most interested in alternatives when they fear the outlook for traditional assets, such as stocks and bonds.
Reporting on this trend, Chief Investment Officer cited the results of a March survey by KPMG, which was in line with Preqin’s findings. “The days of hedge funds simply being an investment tool for high net worth individuals are over,” said Richard Baker, CEO of the Managed Futures Association, as quoted by Chief Investment Officer. “Institutional investors like pension plans, university endowments, and charitable organizations now make up nearly 65% of the industry’s assets.”