WEST PALM BEACH, FL (HEDGECO.NET) – A new study conducted by Morgan Stanley has concluded that hedge funds can help cut investment risks by pension funds, within the context of a holistic approach torisk budgeting. According to Bryan Boudreau and Ka-Wai Tse, authors of the study, it is utterly important that investors realize the maximum possible return given the risks undertaken in what theydescribed as a �current low return environment.�

To guarantee such an outcome, the study said this process �requires careful identification of investment objectives, return sources used to achieve these objectives, and the combination of exposures that can best optimize a given �risk� budget.�

The new study also suggested a framework to help in �setting asset allocation policy to achieve proper balance between required return and surplus risk.� The authors also noted �The case for holding equity may be weaker going forward.� Such a conclusion lends credence from several problems encountered by the markets such as accounting questions, and regulatory proceedings geared towards increasing transparency. This scenario may lead to lower returns from equities compared to historical equity results.

The authors suggested a change in asset allocation ratios from the traditional 70/30 ratio of equities to bonds, to 50/30/10 ratios, between equities, bonds, and hedge funds. They also noted that emphasis is shifting away from the �one size fits all� approach for pension funds to �a framework that considers the particular facts and circumstances for the pension plan and the corporate plan sponsor.�

Pension plans have been increasing hedge fund exposures in light of the lackluster performance of equities in recent years. It is expected that this trend will become a worldwide phenomenon in the near future. US and Canadian pension plans have been investing in hedge funds since the late nineties, after the era marking the collapse of Long Term Capital Management.

Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: [email protected]

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