Pension Funds Poised To Pump Billions Into Hedge Funds

Date: Monday, June 6, 2011
Author: Murray Coleman, Barron

Pension plans — to be more precise, corporate pension plans  —  are expected to pump billions of dollars into hedge funds in coming years to help boost investment portfolio returns.

According to a report by MarketWatch’s Alistair Barr, U.S. corporate pension plans oversee more than $1 trillion and are trying to overcome long-term liabilities that’ve grown after the financial crisis in 2008.

By some estimates, public pension plans are bigger with $2 trillion-plus in assets. They’re expected to increase allocations to hedge funds as well, but not to the extent of corporate plans. Across both private and public, at least one expert tells Barr that pension plans are projected to double their hedge fund allocations in the next few years.

A typical pension plan in the future is likely to have an allocation closer to 10% to hedge funds than the current level of around 5%, says Peter Madsen of investment firm Cube Capital.

“Flows from corporate pensions could be one-third of new hedge fund allocations over the next 1-2 years,” he added.

That’s bound to be good news for investors in public hedgies such as Och-Ziff (OZM) and Fortress Investment Group (FIG). But it’s also likely to speed the move by big private-equity shops like KKR & Co. (KKR) and Stephen Schwarzman’s private-equity giant Blackstone Group (BX), who’ve been increasing their involvement in the hedge funds marketplace.

As of April, the top 100 corporate pension plans were 87.2% funded, according to industry consultant Milliman. That’s better than in early 2009 when it estimated that only 74% were funded.

Now with fresh capital to allocate, they’re apparently preparing to dip a little deeper into hedge funds, which promise greater returns by using a range of sophisticated investing techniques. Of course, those didn’t help much in 2008 when the average hedge fund lost around 20%.

At the same time, the SPDR S&P 500 (SPY) fell 36.7%.