According to a recent blog post from the Managed Funds Association, a growing number of large institutions such as pension funds and university endowments have begun investing with hedge funds in order to improve returns. In fact, as of 2014, institutional investors represent almost exactly two-thirds of the capital invested in the hedge fund industry.
Furthermore, the top 60 largest U.S. public pension funds all invest in hedge funds. These funds allocate an average of 5.6% of their investment assets to hedge funds, which added up to a total of $77.9 billion in 2013.
Low interest rates leads to institutions seeking higher returns
Today’s low interest rate environment is the major factor driving pension funds and other institutions to allocate a larger share of their portfolios to alternative investments such as hedge funds. In fact, according to the 2014 Global Prequin Hedge Fund Report, public pension funds alone represent 22% of the institutional capital invested in hedge funds.
The blog argues that bonds and other more “conservative” investments are simply not offering high enough interest rates for pension plans to meet their long-term goals, given that the baby boomer generation is beginning to collect pensions and that this demographic trend is only going to increase over the next couple of decades. This has led pension funds to reassess their traditional investment styles and consider taking on more risk for higher returns.
Corporate pension funds also moving assets into hedge funds
A 2013 Morgan Stanley report highlighted that 56% of the top 50 U.S. corporate pension plans had begun to use hedge funds as part of their alternative asset portfolio. On average, corporate pension plan invested 5.9% of their total assets in hedge funds, which added up to a total of more than $45 billion.
Hedge funds part of a comprehensive investment approach
According to the blog, hedge funds are becoming an increasingly important tool in pension institutions investment toolboxes. “Hedge funds are not a silver bullet for the challenges facing pensions, but they are increasingly part of a comprehensive and responsible approach toward meeting financial obligations.”