New York (HedgeCo.net) – When the California Public Employees’ Retirement System (CalPERS) announced earlier this year that they were leaving the hedge fund space, it was major news in the financial world. While CalPERS stated that the move had little to do with fees or performance, the financial media didn’t really highlight that point. That information was buried in the last few paragraphs.
Well who needs CalPERS when you can have CalSTRS? Just last week it was announced that the California State Teachers’ Retirement System, the second largest U.S. public pension fund, made a $100 million allocation to hedge fund Red Mountain Capital Partners.
CalSTRS has approximately $191 billion in assets and they have less than one percent allocated to hedge funds, but they have also made it clear that they plan to continue their hedge fund allocations. Historically CalSTRS has favored activist investors as opposed to traditional hedge funds and Red Mountain Capital Partners fits that description.
CalSTRS isn’t the only major pension fund sticking with hedge funds or adding to their allocations. Earlier this month it was reported that the United Nations Joint Staff Pension Fund was looking at adding hedge funds to its portfolio according to a report from CNBC. The UN pension fund holds approximately $52 billion in assets and covers 190,274 participants.
CNBC reports: “The U.N. is considering investing directly in external money managers or using a broader fund of hedge fund structure—or both—according to a person familiar with the situation. Either way, the pension staff views hedge funds as an important portfolio diversification tool that would add to current alternative investments in private equity funds and a non-hedge fund vehicle managed by Ray Dalio’s Bridgewater Associates.”
Two other reports suggest that the hedge fund industry should expect pension funds to continue their allocations to the space. Barclays Capital recently reported that pension plans in the U.S. have increased their allocations to hedge funds by $250 billion in the last five years. In a separate report, State Street published a study where the findings indicated that 77% of pension funds expect their allocations to alternative investments to increase over the next three years.
Hedge funds are particularly attractive to pension funds as they protect the portfolio from downswings better than traditional portfolio management or mutual funds. Where an individual investor knows approximately when they will retire and need their retirement money, a pension fund has to be prepared to make disbursements all the time. Pension funds can’t afford to lose 50% of their value the way the overall market did in the last bear market, therefore they are interested in protecting the downside every bit as much as they are in positive returns.