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Corporate pensions advised to 'buckle seat belts' and replace equities with hedge funds to reduce portfolio risk

Wednesday, July 02, 2014
Opalesque Industry Update - TeamCo Advisers, LLC ("TeamCo"), a privately owned investment advisory firm that manages portfolios of select hedge funds and other opportunistic alternative assets, today provided an in-depth view of Liability-Driven Investing ("LDI") strategies for corporate defined benefit plan sponsors, specifically focusing on the importance of increasing hedge fund exposure in the LDI growth portfolio in order to reduce volatility. The paper, entitled "Buckle Up, For (Your DB Plan) Safety -- the Risk Paradox of Unrestrained Equity Volatility in Liability-Driven Investing Vehicles," was co-authored by TeamCo Managing Director Jeremy M. Kish, CAIA and TeamCo Director Savannah A. Thompson, CAIA.

In the report, TeamCo notes that:·"LDI aims to stabilize a plan's assets and reduce risk by utilizing a symbiotic combination of a growth portfolio (which grows assets) and a hedging portfolio (which hedges liability risk)."

·Instead of relegating risk solely to the hedging portfolio, returns and risk should be considered in both the growth and hedging portfolios in order to help optimize the LDI framework.

·A growth portfolio is typically largely comprised of public equities, which typically have significant downside volatility and can therefore have an adverse effect on the plan's assets, particularly in a down market environment.

·Given hedge funds' historically lower volatility and their outperformance of a blended equity index, TeamCo believes that LDI growth portfolios should include diversified exposure to select hedge funds to help reduce long-term portfolio risk without foregoing return objectives.

Jeremy Kish said, "While there remain compelling reasons to include some equities in the growth portfolio, we believe it is essential that plan sponsors 'buckle their seat belts' and replace a portion of their equity investments with select hedge funds in order to reduce long-term portfolio risk. Based on TeamCo's analysis, increasing hedge fund allocation in the growth portfolio can significantly minimize volatility without foregoing return objectives, enabling the portfolio to continue to grow assets while cutting risk. Importantly, incremental substitutions of hedge funds for equities can not only help plans survive market turbulence, but can also help them achieve the growth necessary for LDI endeavors to succeed."

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