Don Steinbrugge of Agecroft Partners released his annual list of hedge fund trends and predictions for 2020. He covers a few common bases: Hedge fund assets will set a new record, a reduction in expected returns, and how long-short specialty funds will see a boost to AUM.

But he offers a few wild cards and provides some solid analysis on why pension funds will likely increase hedge fund allocation in 2020. Hint: Interest rates matter. He writes:

“Most public pension funds have an actuarial rate of return assumption around 7.5%. With interest rates and credit spreads near historic lows, pension funds will look to hedge funds to enhance returns in two ways. Many will either allocate some assets away from fixed income into to a diversified portfolio of uncorrelated hedge fund strategies or by viewing hedge funds as a ”best in breed” manager and allocating part of their fixed income allocation to hedge fund strategies such as, distressed debit, specialty financing, structured credit, relative value fixed income among other strategies. With the yield on the aggregate bond index in the mid- 2% range, the bar is low for hedge funds to add value on a risk-adjusted return basis.”

Don Steinbrugge: Pensions and Hedge Funds

A quick sweep of the news reveals that pension funds are turning to alternative investment funds quickly in 2020. San Francisco’s City & County Employees’ Retirement System disclosed eight investments worth $655 million this week. The massive pension fund is sending at least $200 million to hedge fund Elliott Management.

Meanwhile, despite all of the chatter around ESG investing, it turns out that pensions just aren’t making the transition. A new report says that more than 57% of the Society of Pension Professionals’ (SPP) membership has failed to make any portfolio changes related to ESG standards. But remember, sales team – there is still “genuine interest”, the research says.

This column contains excerpts from today’s DailyAlts Playbook, our morning commentary on the alternative investment world. Get it delivered to your inbox each morning for free.

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