New York (HedgeCo.Net) Over the last five years, corporate pension funds have quadrupled their allocations to hedge funds, but some of those funds may be having regrets as the hedge fund industry has lagged the overall market during this bullish phase.
According to hedge fund research firm Preqin, private sector pension funds now account for nearly 20% of investments in hedge funds on a global basis. This makes private pension funds the second largest investor in hedge funds, behind only public sector pension funds. Five years ago private sector pension funds were fifth in terms of total allocations to hedge funds.
As has been well documented, the hedge fund industry as a whole has lagged the overall market for the better part of the last five years. However, as we at HedgeCo.net and HedgeCoVest.com have noted, during a raging bull market, hedge funds are more likely to lag the overall market. When the next bearish phase hits, the hedge fund industry as a whole is likely to outpace the overall market.
A recent Wall Street Journal article included a quote from Jim McKee, head of hedge fund research at pension fund advisory firm Callen Associates. “There’s certainly regret, the last five years have been disappointing for pensions invested in hedge funds,” stated McKee.
Of course they regret moving to pension funds during the second biggest bull market in history. They also regret not being more heavily invested in hedge funds during the two bear markets we have experienced already during this century.
Just over a month ago, we featured an article in our newsletter entitled Should Hedge Funds Be Rooting For A Bear Market? In the article, we pointed out how the overall market tends to beat hedge funds as a whole during big rallies and then when the market dips, hedge funds outperform.
While pension funds may regret being more heavily allocated to hedge funds from March 2009 up through now, but the question becomes, “Which regret is bigger? Not being invested in hedge funds in the first decade of this century or being heavily allocated to hedge funds now?” If the pension fund managers have regrets, they should just wait until the next bearish phase in the market before getting too upset. Otherwise, they are suffering from “would’ve, should’ve, could’ve syndrome” and that sounds more like something retail investors would do.
Having regrets about taking a more steady approach and allocating to hedge funds to protect the downside after the fact is trying to invest in hindsight and it reminds me of a conversation I had with an investor 14 years ago. I talked to this particular investor at an investment conference in early 2001. This investor had bought Yahoo stock in the $30-$40 range, he watched the stock climb to $120, but didn’t sell it.
He then watched it fall below the $20 level and he didn’t sell it. And now he was asking me what to do with the stock. I asked him why he hadn’t sold it or at least part of it when it was over $100. He replied, “I didn’t want to sell it then because of how much in taxes I would have had to pay.” To which I replied, “Alright, why don’t you sell it now and take the loss for tax purposes?” This time his answer was, “I can’t sell it now, it’s at a 50% loss.”
The bottom line is this retail investor didn’t have an exit plan at all. He was wishing he would’ve sold it when it was over $100. He should’ve not worried about the tax consequences and then he could’ve saved himself a lot of misery. If pension fund managers are having regrets and start moving money away from hedge funds now, I get the feeling they will regret it when the next bearish phase hits the market.