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Alternative Market Briefing

Other Voices: Should public pension funds reduce their hedge fund allocations?

Tuesday, November 01, 2016

Donald A. Steinbrugge, CFA – Founder and CEO, Agecroft Partners

CalPERS was the first high profile public pension to pull out of hedge funds, and was followed a year and a half later by one of the New York City retirement plans. Recently, the number of public pension funds exiting or reducing their hedge fund exposure has accelerated. We believe this trend will increase over the next 12 months due to growing political pressure on investment staffs of public pension funds from the media, union employees, and politicians. The pressure is being driven by unrelenting negative articles about the industry focused on the recent poor performance of various hedge fund indices and high fees.

This trend comes at a time when the average public pension fund is only approximately 74% funded based on an average actuarial rate of return of 7.5% according to a research report from Wilshire Consulting's Investment Research Group. Many professionals believe that this expected return is unachievable in today’s low interest rate environment. If the actuarial rate of return was lowered to approximately 4.5%, which is what corporate pension funds are required to use, the unfunded liabilities of public pensions would skyrocket.

Many critics cite the underperformance of hedge fund indices, as compared to equity benchmarks since the 2008 market crash, as the basis for exiting hedge funds in favor of an increased allocation to stocks. This strategy strains limits of portfolio diversi......................

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