Private Pensions Pull Away from Hedge Funds, Public Pensions Stay Put

Current estimates suggest that companies are taking money away from hedge funds at the highest rate since the recession. Many blame the industry’s high fees for their decision, but those within the industry say that the bad reputation that surrounds hedge funds may be the driving factor. Despite this trend, public pensions are staying firmly rooted in hedge funds.

Reuters elaborates on the issue:

Recent moves by a few large institutional investors were seen as the beginning of a mass exodus. In 2014, the $300 billion California Public Employees’ Retirement System said it was getting out of most hedge funds. Then, this February, the $15 billion Illinois State Board of Investment said it would reduce its target allocation from 10 percent to just 3 percent. In April, the $51 billion New York City Employees Retirement System (NYCERS) decided to exit hedge funds entirely.

Henry Garrido, a worker union leader and NYCERS trustee, cited the industry’s high fees and poor performance in scoring a near-unanimous vote in favor of his proposal to axe about $1.4 billion from hedge funds including Brevan Howard and D.E. Shaw Group, about 3 percent of its portfolio.

“I think it’s insane,” Garrido said in a pension trustee meeting this year, “that we keep pouring money into hedge funds.”

Data, however, suggest that U.S. public pensions are staying put. The number of public pensions that use hedge funds has steadily increased to 282 in 2016 from 234 in 2010, data from research firm Preqin show. The average percentage of pension portfolios in hedge funds has also rose to nearly 10 percent.

Steve Yoakum, executive director of the Public School & Education Employee Retirement Systems of Missouri, said his pensions are sticking with hedge funds despite concerns about high fees and low returns.

“We are parking our money there because we don’t like the alternatives,” Yoakum told Reuters, adding “They are doing what they were hired to do.”


Mark McCombe, global head of BlackRock’s institutional client business, said pensions will continue to look to hedge funds to help them achieve their financial goals.

“These are very individual decisions,” McCombe said of the CalPERS and NYCERS pull outs. “This is not a systemic move away from hedge funds.”

Many of the companies that are pulling out of hedge funds maybe expecting a stock-like turn around on investment, and may be disappointed when that doesn’t happen. For more on the issue, read the full article here.

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