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While we're on the subject, consider the fact that
pension funds are once again loading up on "alternative
investments", this time in the form of hedge funds:
Pensions Leap Back to Hedge Funds
Public pension plans are lifting hedge-fund investment, seeking to boost
long-term returns despite losses suffered in some funds in the financial
crisis.
Also, pension officials are using the
historically strong returns of hedge funds to justify a rosier future outlook
for their investment returns. By generating more gains from their
investments, pension funds can avoid the politically unpalatable position of
having to raise more money via higher taxes or bigger contributions from
employees or reducing benefits for the current or future retirees.
The Fire & Police Pension
Association of Colorado, which manages roughly $3.5 billion, now has 11% of
its portfolio allocated to hedge funds after having no cash invested in these
funds at the start of the year. "There has been some deserved criticism
of hedge funds, but many hedge funds during the market downturn in 2008 did
better than the S&P 500," said Dan Slack, the chief executive of the
system.
While pensions have been investing in
private equity and what are called alternative investments for many years,
hedge funds have represented a smaller part of their portfolio. The average
hedge-fund allocation among public pensions has increased to 6.8% this year,
from 6.5% for 2010 and 3.6% in 2007, according to data-tracker Preqin.
The number of public pension plans
investing in hedge funds has leapt 50% since 2007 to about 300, according to Preqin. State pension systems had $63 billion invested in
hedge funds as of their fiscal 2010 and are expected to invest another $20
billion in hedge funds in the next two years, according to a recent report by
consultant Cliffwater.
In March, the New York City Police
Pension Fund voted to invest in a firm that puts money into a variety of
hedge funds, the first such move by the city's pension funds, which manage
$117 billion. In the past few months, two more New York City pensions made
the same decision. Together the three funds invested $450 million with
hedge-fund firm Permal Group.
It is a "first step into hedge
funds," said Larry Schloss, the New York City
chief investment officer. He says he hopes the investment will help the
city's pension system avoid the "wild ride" it has taken in recent
years. The system had $115 billion before market tumble in 2008, when it fell
to $77 billion.
New Jersey's State Investment
Council, which sets investment policy for the state's pension fund, voted
last week to raise the target allocation for hedge funds to 10% from 6.7%,
which would make hedge funds the $73 billion fund's largest alternative
investment asset.
Some thoughts:
- Once
upon a time pension funds invested mostly in low risk-assets like bonds,
because risk was unacceptable for money that had to be there. Pensions
are legally binding promises made by governments to their workers, so
non-payment isn't an option; when a pension fund fails taxpayers are
generally stuck with the bill.
- But
with the US government keeping interest rates artificially low in order
to ease its debt burden, the available returns on low-risk investments
has fallen to a fraction of the rate that pension funds need to cover
the promises made by government officials to buy union peace. So pension
funds are "diversifying" into "alternative"
investments like hedge funds that promise higher yields.
- This
will work beautifully in the aggregate as long as the markets are
generally moving up, i.e. as long as the "risk-on" trade is
profitable. As soon as a slowing economy, the dissolution of the Eurozone, a Middle East crisis, or just a technical
20% correction sends capital scurrying away from high-risk strategies,
hedge funds -- and real estate and private equity and foreign growth
stocks -- will not only fail to generate the necessary 8% return;
they'll suffer losses, which will pull the entire pension fund complex into
the red, moving them even further from their promised trajectory.
- Of
course, the alternative is to load up on bonds and cash, which, with the
dollar being depreciated at an accelerating rate, will probably be the
worst possible investments going forward. So given the mess the US has
made of its financial markets, maybe hedge funds are actually the
lowest-risk alternative.
John Rubino
DollarCollapse.com
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