More pension plans are investing in hedge funds than ever before. What’s more, they are putting a great portion of their assets under management into those funds, says a new study.
There are now 295 public pension plans worldwide that are known to be investing in hedge funds, a 50 per cent increase from 2007, according to a study just released by hedge fund data company Preqin.
The percentage of assets allocated to hedge funds is also growing, from a mean of 3.6 per cent in 2007 to 6.5 per cent, Preqin says. That’s a full percentage point higher than the average private equity allocation for pension funds.
Four-fifths of public pension funds say they made their first investment in hedge funds though funds of funds. And 70 per cent of pension funds that invest in hedge funds have funds of funds in their portfolio.
This piles on fees for the pension funds—they pay a fee to the fund of funds manager and then another to the underlying fund. It’s a terribly inefficient way to allocate money—except that most pension fund managers probably lack the requisite skills to go it alone.
Fortunately, pension fund managers say they seek an absolute return of just 6.1 per cent—lower than the average hedge fund investor, who seeks a 7 per cent return, according to Preqin.
Shortly after the Madoff scandal broke, there was lots of speculation that pension funds and other investors would turn against hedge funds. Apparently, that hasn’t happened.