A review in the WSJ on the book The Hedge Fund Mirage by Simon Lack notes:
The return-on-investment targets of 7% to 8% that are structured into pension plans are beyond reach in today’s artificial environment. To redeem their promises to retiring teachers, firemen and the like, managers are risking more money with hedge funds in hope of yields higher than those on safer investments.
And so it is, as I read subsequently that:
Just five years ago, it was illegal for South Carolina’s public pension plan to invest in hedge funds, private equity and other complicated bets.
Now, nearly half its assets are in such investments. That is way too much for the state treasurer, who is charged with squeezing the most out of the $26 billion pension fund.
Unfortunately, hedge funds are doing worse than ever:
The “Global Macro” trading strategy, one of seven tracked by the Dow Jones Credit Suisse “Core Hedge Fund Index,” finished last year down over 10%, worse than the entire index, which fell 7.4%.
This isn’t going to end well. The risk premium of 5% that everyone expects is not going to happen, and this failure will act as positive feedback in the upcoming fiscal disaster; when the pension funds all under perform and need more money, it will be the nail in the coffin. I think the tinder will be inflation, which the central banks seem to think is the cure for their ills, so they will push until it comes back.