Pension funds seek alternatives in hunt for yield

Date: Tuesday, December 8, 2009
Author: Reuters

 * Allocations to hedge funds, PE, emerging mkts growing

* Calpers spearheaded move into alternative investments

* Numbers down at Alternative Investment conference

Large public pension funds in New York, California and Ohio are looking increasingly to alternative investments in hedge funds, private equity and emerging markets in a global hunt for yield, senior managers and trustees said.

The global credit crisis has put a squeeze on money managers who must try to boost returns by looking at nontraditional investments that are a growing allocation in some portfolios, in some cases making up more than a quarter or more of fund holdings.

"We're going to act prudently and be hesitant to rapidly increase our assets to alternatives, but we're pretty much of the opinion that that's where you have to be," said Joe Alejandro, treasurer of the New York City Patrolmen Benevolent Association, during an Alternative Investment conference on Sunday.

The U.S. recession has hit states including Ohio hard but alternative investments in areas such as real estate and casinos may present opportunities, added J.P. Allen, investment committee chairman of the Ohio State Highway Patrol retirement system.

Allen said many funds have assumptions of 7 percent to 8 percent return and his fund is expected to beat those assumptions this year.

"When things are bleak, now is the time to buy, when there's blood on the street," said Allen, who said his fund benefited from real estate and timber investments in 2008. It has since pared back on some of those investments, he said.

The California Public Employees' Retirement System, or Calpers, the world's biggest public pension fund with over $200 billion in assets, spearheaded the move by public pensions into alternative investments.

Calpers invested in private equity, high-end vineyards and hedge funds in the late 1990s and early 2000s. But not all of those investments fared well. A $500 million equity investment in Manhattan's Peter Cooper Village and Stuyvesant Town, a sprawling apartment complex, has drawn criticism.

The venture's partners are now close to defaulting on $3 billion of debt and the equity has been wiped out. For more see [ID:nN2250368].

New York's Alejandro said his current allocation is about 70 percent equity and about 25 percent in bonds and alternative investments, which he would like to increase to between 30 and 35 percent. He said he has made a push for greater investments in hedge funds of funds, private equity and real estate to the new comptroller, who starts in January.

About 350 hedge fund managers, trustees and treasurers attended an Alternative Investment conference that began on Sunday held at the Ritz-Carlton in Dana Point, California, sponsored by the Opal Financial Group.

That's down from about 400 participants last year, organizers said, and a sign of how the market for complex investments has shrunk.

More than 1,000 participants attended the group's annual Collateralized Debt Obligation conference before the credit crisis hit two years ago. The group has since canceled its annual CDO and CLO conference and focused on alternative investments.

Keith Rodenhuis, trustee of the $7 billion Orange County Retirement System, said he holds about a 10 percent allocation in real estate, 7 percent in "absolute return," which includes hedge fund positions, and 5 percent in private equity.

Rodenhuis said his fund boosted "real return assets" to 13 percent from 10 percent, involving investments in commodities and timber. The fund cut back investments in international fixed income to boost those real return assets, he said.

The fund is looking to allocate from zero to 5 percent in opportunistic investments such as distressed mortgage funds.

"We're hoping that slowly climbs back," said Rodenhuis, who also sees opportunities in energy, green technology and local medical technology, as "Orange County is a hotbed for medical technology," he said.

Ohio's Allen said many retirees took hits in the wake of the global credit crisis, but alternative investments in timber and real estate in 2008 helped offset losses, although he has since sold some of those assets to book profits.