Monday, September 20, 2010

Public Pensions Score Big With Hedge Funds

It seems some large public pension funds really know what they are doing when it comes to investing in hedge funds. According to Pensions & Investments, a sample of eight of them is easily besting the overall industry with their own hedge fund portfolios.

Those plans, with between $1.2 billion and $5.5 billion in hedge fund assets, saw their hedge funds return an average of 11% over the past year. That’s well above the performance of most hedge fund indices.

The Pennsylvania Public School Employees’ Retirement System saw its $5.1 billion hedge fund portfolio return 15.6% in the 12 months ended June 30. The New Jersey Division of Investment’s hedge funds soared 13.9% over the same period.

The Missouri State Employees’ Retirement Systems’ hedge funds rose 12.6%, those of the California Public Employees’ Retirement System rose 9.8% and the Texas Teacher Retirement System’s 7.7%.
These are impressive returns (even if it's mostly beta), and when it comes to alternatives, I still prefer hedge funds (both internal and external), over other less liquid alternatives (PE, RE, and Infrastructure). These hedge fund portfolios are adding significant value to these public pension funds, but it remains to be seen if they can continue producing these outsized returns without taking on excess risk.

One thing is for sure, hedge funds aren't dead, and in a world of shrinking alpha, pension funds will still allocate to hedge funds to capture risk-adjusted returns. As always, my only concern is that far too many pension funds don't know what they're doing when it comes to investing in hedge funds, and many are just paying alpha fees for leveraged beta.

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