Public pensions exposed to losses in hedge funds |
Date: Wednesday, August 22, 2007
Author: Chicago Tribune
NEW YORK - Recent market turmoil is likely to test the mettle of public pensions invested in hedge funds.
Craving returns that are higher than plain-vanilla stocks and bonds,
public pensions poured billions of dollars into hedge funds at a time
of low volatility and solid returns. This month, though, some hedge
funds have suffered double-digit percentage losses, which could sting
pensions that recently have embraced this asset class.
In July,
before the market upheaval took hold of a widespread array of hedge
funds, California's and New Jersey's massive pension funds endured mild
losses in their hedge-fund investments for the month. And while the
California Public Employees' Retirement System and other well-heeled
investors are no strangers to difficult markets, this will be the first
time many pensions have had to navigate broad turbulence in their
hedge-fund portfolios.
"Frankly, we haven't had much of an opportunity to test it until now,"
said Robert Gentzel, spokesman for Pennsylvania's State Employees'
Retirement System, of the pension's $8.5 billion hedge-fund portfolio.
Done right, hedge funds should help pensions mitigate their losses when
markets sour. Hedge funds aim to profit from downturns by investing in
an array of assets and tools, such as currencies or derivatives.
But hedge-fund declines also can be more rapid and severe than declines
in straight stock or bond portfolios, because of their heavy reliance
on borrowed money to make trades.
At the start of August, for
example, a wave of losses hit funds that use computer models to pick
which stocks and other securities will rise and fall. The damage from
this strategy was by no means limited to hedge funds, but their losses
were far worse. Some hedge funds had losses in the double digits in
less than two weeks because of their leveraged positions.
How
pensions' investments in hedge funds hold up when the dust settles will
help determine how they manage these tricky portfolios going forward,
industry watchers say.
So far, public pensions appear to have
lost minuscule amounts in their hedge-fund portfolios in July. Calpers,
the nation's largest public pension, lost 0.3 percent. New Jersey's
pension lost roughly $10 million in its $2.4 billion hedge fund
portfolio last month, compared with $900 million in its $31.6 billion
domestic stock portfolio. The Pennsylvania pension saw gains of 0.5
percent in its hedge-fund portfolio.
But the damage to funds in
August is likely to be worse. The August performance numbers aren't yet
available for most of the funds, but Hedge Fund Research Inc.'s HFRX
Global Hedge Fund index was down 5 percent for the month as of Friday,
bringing the index down less than 1 percent for the year.
To be
sure, hedge funds have been instrumental in propelling pension returns
forward in recent years, and that will be a matter for consideration.
Just last month, Calpers trumpeted its best annual performance in a
decade and said it was fully funded, with $247.7 billion in assets at
the end of June. The month before, it announced plans to double its
investments in hedge funds, to $10 billion, following five years of
strong performances.
By mid-August, however, the fund was
dealing with a different investment environment, as stock and bond
markets endured a beating. As of Aug. 13, just six weeks into Calpers'
2008 fiscal year, its assets had declined by 1.3 percent, or $3.3
billion, since June 30, according to a report to the board by Chief
Investment Officer Russell Read.
In the report, Read said the
recent turmoil was creating investment opportunities that would lead to
higher results in the future. But he also warned that "we are virtually
certain that this year's returns will not be as strong as last year's."
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