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Denver Post – College endowments and state pension funds that once plowed billions of dollars into hedge funds and private-equity investments as a way to balance their stock holdings officials are watching the value of their alternative investments shrink.
So far, the losses are mostly on paper, but analysts say they could eventually lead to reduced payouts to retirees, higher taxes so state governments can fulfill their promises, or less cash available for colleges to give out as financial aid.
In recent years, endowments and pensions heaped cash into hedge funds — private investment funds that often use unconventional and risky trading strategies. They also bought into private-equity funds, which make direct investments into private companies or buy them out.
Denver Post – First, the money rushed into hedge funds. Now, some fear, it could rush out.
No one expects a wholesale flight from the nearly $2 trillion world of hedge funds, but even a modest outflow could reverberate through the financial markets.
To pay back investors, some funds might be forced to dump investments at a time when the markets already are shaky.
The big worry is that a spate of hurried sales could unleash a vicious circle within the hedge fund industry, with the sales leading to more losses and those losses leading to more withdrawals, and so on.
This is shaping up to be the industry’s worst year on record, with the average fund down nearly 10 percent so far, according to Hedge Fund Research.
