Pension Hedges Bets

Terry Flanagan

The pension-hedge fund relationship grows as big hedge funds win allocations.

New York City’s retirement system, which includes public pensions for New York City firefighters, police force and public employees, recently directly allocated individual mandates totaling nearly $1 billion to three large hedge funds.

British-based giant Brevan Howard Asset Management and D.E. Shaw Group will each receive a mandate of $350 million, and New York-based Brigade Capital Management will run $200 million.

Pensions are following the endowment model of “best in breed strategy investing,” according to managing member of institutional consultancy, Agecroft Partners.

“We are in the middle of a 10 year trend during which we will see an increase in the number of pension funds allocating to hedge funds, and the transition toward direct programs for the largest well-known hedge funds will have long-term implications,” he said.

The end of February posted gains for the S&P 1200 pension plans. The group’s aggregate deficit was $410 billion, which was a decrease of $21 billion from January. Funded ratios have slowly increased from last 75 %to 79% from December to January, according to Mercer, who cited that a recent equity rally is also responsible for pension gains.

Despite hedge funds suffering through a sluggish fourth quarter in 2011, institutional investors with a long-term view continue to feel positive about the alternative investors. Bill Atwood, the executive director of Illinois State Board of Investment told Markets Media that the pension had no plans to change the fund’s asset allocation in 2012; its hedge fund mandate is currently hovering 10%.

For many public plans, allocations will reportedly increase such that pensions may be the largest contributor to growth in the hedge fund industry in 2012. However, a preference for direct hedge funds over fund of fund programs have emerged the dominant trend in the burgeoning pension-hedge fund relationship.

The New York City plans are targeting a $3 billion allocation to hedge funds, which currently amounts to $1.35 billion. New York’s other two other city pensions, which manages money for public education, do not currently have any hedge fund allocation.

Both the hedge funds and pension plans noted in this story were not able to provide additional comment by press time.

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