Hedge Funds Will Triple Within Decade Amid Low Bond Yields, SkyBridge Says

Date: Wednesday, October 6, 2010
Author: John Detrixhe, Bloomberg

The $1.6 trillion hedge-fund industry will triple in size in the next 10 years as investors try to limit stock market risk while seeking higher returns than bonds offer, said Anthony Scaramucci of SkyBridge Capital.

The Standard & Poor’s 500 Index has lost 20 percent in the last three years. While U.S. corporate bonds returned 27 percent over that period, their yields fell to a record low 4.59 percent yesterday, according to Bank of America Merrill Lynch index data. Hedge funds returned 1.45 percent on average this year through August, according to Chicago-based Hedge Fund Research.

Investors including pension managers will be enticed by hedge funds offering “lower risk with moderate to higher returns,” said Scaramucci, a managing partner at SkyBridge, a money manager that oversees $7.4 billion in assets and also invests in hedge funds. U.S. corporate pensions have fallen behind future payouts to retirees by the most in a decade, according to actuarial firm Milliman Inc.

“They need higher returns than what the fixed-income markets are giving them,” Scaramucci said in an interview at the Capital IQ conference in New York yesterday, as Treasuries fell to 1.37 percent, the lowest ever, index data show. “What’s really going to move the needle for hedge fund allocations will be pensions.”

The gap between the assets of the 100 largest company pensions and their projected liabilities widened by $108 billion in August from the previous month to a $459.8 billion deficit, Seattle-based Milliman said Sept. 14 in a statement.

Missing the Mark

In fiscal 2009, fewer than half of the 50 state retirement systems had enough assets to pay for 80 percent of promised benefits, according to data compiled for the Cities and Debt Briefing hosted by Bloomberg Link in New York on Sept. 15. Two years earlier, only 19 missed the mark.

Illinois covered just 50.6 percent of benefits last year, the lowest so-called funded ratio, which actuaries say shouldn’t be less than 80 percent.

Hedge funds pulled in a net $23 billion in the first half of this year, according to Hedge Fund Research. At that rate, this would be the third-worst year for attracting deposits since 2001.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net