Hedge Funds Cost Pension Funds $15 Billion – ValueWalk Premium
Hedge Funds Pension Funds

Hedge Funds Cost Pension Funds $15 Billion

All That Glitters Is Not Gold: An Analysis of U.S. Public Pension Investments in Hedge Funds

H/T Barry Ritholtz

Hedge funds have aggressively pursued U.S. public pension dollars, maintaining that they offer pension funds absolute return and volatility reduction in exchange for the high management and performance fees that they charge. And many public pension systems, with encouragement from their investment consultants, have made significant allocations to hedge funds, chasing the promise of superior returns and downside protection. These pension funds now have sufficient experience to evaluate whether hedge funds have delivered on their promise, and whether the purported benefits are worth the high fees.

This report examines whether hedge funds have, in fact, provided U.S. pension funds better and less correlated returns, and whether hedge fund fees are adequately disclosed and as disproportionately high as critics suggest. In other words, we seek to answer the question: ”Would public pension funds have fared better if they had never invested in hedge funds at all?”

To answer this question, we analyzed 11 US. public pension funds’ experience with investing pensioners’ savings in hedge funds. Using publicly available data and information provided directly by the pension funds, we conducted a simple year-by-year comparison of hedge fund net returns and total fund net returns for each pension fund. We also compared these rates of return to fixed income net returns for each pension fund to determine whether hedge funds delivered on the promise of uncorrelated returns and whether less expensive fixed income strategies do better. Because hedge fund fees are almost never reported or fully accounted for, we used industry standard fee structures like management and incentive fees then projected actual fees captured by hedge fund mangers based on readily available statements of net return to investors. These calculations, while not precise due to lack of transparency with respect to fees, allow us to draw general conclusions about the performance of pension funds’ hedge fund investments.

Key Findings: Hedge Funds Were Responsible for an Estimated $8 Billion in Lost Investment Revenue

Our findings suggest that these 11 pension funds’ hedge fund investments failed to deliver any significant benefits to the pension funds studied. Specifically, we found that:

  • Hedge fund net return rates lagged behind the total fund for nearly three quarters of the total years reviewed, costing the group of pension funds an estimated $8 billion in lost investment revenue.
    Despite lagging performance, hedge fund managers collected an estimated $7.1 billion in fees from the same pension funds over the period reviewed; on average, our estimates suggest that these pension funds paid 57 cents in fees to hedge fund managers for every dollar of net return to the pension fund.
  • Whereas hedge fund managers promise uncorrelated returns and downside protection, 10 of the 11 pension funds reviewed demonstrated significant correlation between hedge fund and total fund performance.

Recommendations:

Considering the implications of these findings for pension fund trustees, participants and consultants, we recommend that public pension funds currently invested in hedge funds immediately take the following steps:

  • Conduct an asset allocation review to examine less costly and more effective diversification approaches. The review should include a compete analysis of past net performance of their hedge fund investments, as well as a comparison to low-fee alternatives.
  • Require full and public fee disclosure from hedge fund managers and consultants, including complete disclosure of historical investment management and incentive (carry or profit sharing) fees captured by hedge fund managers for the duration of their fund’s investments. Pension funds should also consider developing legislative policies requiring this level of disclosure.

All That Glitters Is Not Gold: An Analysis of U.S. Public Pension Investments in Hedge Funds

Introduction

Over the last decade, hedge fund managers and consultants have convinced many U.S. public pension funds to invest hundreds of billions of public pension dollars in hedge funds-largely unregulated, high-cost investment vehicles that promise outsized returns and volatility protection for their investors. As of mid-2014, $450 billion in US. public pension assets was invested in hedge funds,1 and one-fifth of institutional investor capital invested in hedge funds came from public pension plans.

Recently, however, hedge funds have come under scrutiny, as 2015 is on track to be a record low year for hedge fund returns, following many more years of disappointing performance. Many investors are now beginning to question the ability of hedge funds to live up to their claims-and some investors, such as the California Public Employees’ Retirement System (CalPERS), the nation’s largest public pension fund, have decided to divest from the asset type entirely.

This report examines whether hedge funds have in fact provided U.S. pension funds better and less correlated returns, and whether hedge fund fees are transparent and as disproportionately high as critics suggest. In other words, we seek to answer the question: “Would public pension funds have fared better if they had never invested in hedge funds at all?”

To answer this question, we analyzed 11 U.S. public pension funds’ experience with investing pensioners’ savings in hedge funds. Using publicly available data and information provided directly by the pension funds, we conducted a simple year-by-year comparison of hedge fund net returns and total fund net returns for each pension fund, and also compared these rates of return to fixed income net returns for each pension fund to determine whether hedge funds delivered on the promise of uncorrelated returns.

Hedge Funds Pension Funds

Hedge Funds Pension Funds

Hedge Funds Pension Funds

See full PDF below.

LEAVE A COMMENT


X
Saved Articles
X
TextTExtLInkTextTExtLInk

The Life and Career of Charlie Munger

Charlie is more than just Warren Buffett’s friend and Berkshire Hathaway’s Vice Chairman – Buffett has actually credited him with redefining how he looks at investing. Now you can learn from Charlie firsthand via this incredible ebook and over a dozen other famous investor studies by signing up below:

  • Learn from the best and forever change your investing perspective
  • One incredible tidbit of knowledge after another in the page-turning masterpiece of a book
  • Discover the secrets to Charlie’s success and how to apply it to your investing
Never Miss A Story!
Subscribe to ValueWalk Newsletter. We respect your privacy.

What’s missing today for many investors is real, straightforward advice.

Especially when it comes to Value Investing and Hedge Funds. 💵

That’s what makes ValueWalk Premium different. Some would say we’re “unusual.”

Our subscribers look forward to clear, easy-to-understand information they can act on.

Sign up for  today for only a few dollars a day and get a 3 day no obligation trial with a targeted 20% discount coupon code.

Cancel anytime during trial and you are never charged.

Limited time offer: For first 50 subscribers

0