Hedge funds experienced the most asset growth of any alternative asset class in 2014, according to a Preqin report.
Despite scrutiny over low returns and high expenses, investors put more money into hedge funds in 2014 than private equity, infrastructure or venture capital.
More from Chief Investment Officer:
Despite a disappointing year for returns and some high-profile withdrawals from the sector, Preqin’s “2015 Global Alternatives Report” showed that hedge fund industry assets grew by roughly $360 billion during the year.
This accounted for more than half of the $690 billion increase in total assets invested across hedge funds, private equity, venture capital, private real estate, and infrastructure. In total, Preqin estimated $6.91 trillion was invested across these sectors.
“The recent news of CalPERS cutting hedge funds and reducing the number of private equity partnerships within its portfolio does not reflect the wider sentiment in the industry,” said Mark O’Hare, CEO of Preqin.
“From our conversations with investors, the majority of investors remain confident in the ability of alternative assets to help achieve portfolio objectives.”
However, Preqin predicted that investors would continue to scrutinise hedge fund performance and fees during 2015.
Preqin’s “2015 Global Alternatives Report” can be bought here.
Does Investment Return Affect Pension Costs? Larry Bader, who worked as an actuary for 20 years before moving to Wall Street, tackled that question in the latest issue of the Financial Analysts Journal.
An excerpt of his answer:
Answer: It doesn’t.
Yes, a higher return on plan assets reduces the funding requirements for the pension plan and the expense that the sponsor must report. But the plan’s true economic cost is independent of the investment performance of the plan assets.
To see why this is so, suppose that you establish a fund to pay for your child’s college education and I do the same for my child. We make equal contributions to our respective funds, and we both face the same tuition payments. But being a smarter, bolder, or luckier investor, you grow your college fund to twice the size of mine. Can we now say that your child’s education costs less than my child’s education? Surely not. Our tuition payments are the same; it’s just that you have a larger education fund available to help pay your child’s tuition.
Or think of it this way: Suppose that your college education fund performed miserably and a similar fund that you had set up to buy a small vacation home struck it rich. Would you now say that college tuition has become very expensive but vacation homes very cheap? Can you now afford to buy a vacation mansion — or private island — but not to send your child to college? Behavioral economics suggests that you might think along those lines, but common sense says, “Get over it.”
Similarly, a higher pension fund return does not lower the economic cost of the plan. The economic cost reflects solely the amount and timing of the pension payments, which are unaffected by the size or growth of the assets.
To read the full answer, click here.