Pension funds continue to invest into hedge funds, say AIMA paper

27 Jan, 2015

Roughly one in every four dollars – or $700 billion – managed by the $2.85 trillion hedge fund industry is derived from public and private pension funds, according to an educational paper published by the Alternative Investment Management Association (AIMA) in conjunction with the CAIA Association.

The paper – “The Way Ahead: Helping Trustees navigate the hedge fund sector” adds public and private sector allocations into hedge funds are likely to increase. This comes as a number of high-profile pension plans have retreated from hedge funds. In September 2014, the California Public Employees’ Retirement System (CALPERS) announced it would pull its entire $4 billion hedge fund portfolio citing the asset class’ cost and complexity.

CALPERS is not alone, and a handful of other US public pension funds are rethinking their hedge fund allocations. Pension plans in Europe including the Dutch pension fund PMT, the London Pension Fund Authority, the BT Pension Scheme and the Railways Pension Scheme in the UK are all reassessing their hedge fund investments.

Despite the recent negative press, the AIMA/CAIA paper highlights investors have earned nearly $1.5 trillion from hedge funds after fees over the last 10 years. This is despite the performance losses of $306 billion in 2008.

Nonetheless, the traditional hedge fund fee structure – the 2 per-cent management fee and 20 per-cent performance fee – has been under scrutiny for some time now amid disappointing performance. However, research by the prime brokerage arm at Goldman Sachs indicates otherwise. A survey of investors by the capital introductions arm of Goldman Sachs Prime Services found the average management fee to be 1.6 per-cent and the average performance fee to be 18.1 per-cent in 2013, a marginal drop from 2012. A survey of clients by law firm Seward & Kissel reached a similar conclusion, finding management fees stuck around 1.6 per-cent while performance fees continue to be pegged at 20 per-cent. .

The AIMA/CAIA paper also highlighted institutions such as pension funds preferred risk-adjusted and steadier returns as opposed to products offering higher returns albeit with greater volatility. The paper highlighted hedge funds provide investors with greater protections during drawdown periods, a feat few asset classes can offer. The study said the HFRI Composite Index experienced a maximum drawdown of 21.4 per-cent (between November 2007 and February 2009) in the last 10 years. Only bonds experienced a smaller drawdown in this 10 year period of 10 per-cent. This compares with real estate which suffered a drawdown of 35 per-cent and the 57 per-cent and 54 per-cent drawdowns experienced by the S&P 500 and commodities respectively.

This paper is the first in a series between now and 2016. These papers will cover topics such as hedge fund strategies, transparency and governance.