Hedge Fund Reader : Pension Funds Investing Heavily in Hedge Funds

December 01, 2005

Pension Funds Investing Heavily in Hedge Funds

Driven by the growing numbers of retirees, pension funds and plans are investing billions of dollars into hedge funds. Hedge funds, which once upon time were known to be the domain of the super rich, are nowadays the preferred choice of many a pension funds.

According to a recent study, by 2008, the pension plans and other such large institutions are expected to invest as much as $300 billion in these secretive and lightly regulated investment partnerships. This is up from an estimated investment of $5 billion into hedge funds a decade ago. This is a huge shift and the effect of such a trend could be phenomenal, as pension funds account for close to 40 percent of all institutional money.

The investment council, which oversees the New Jersey state employees’ pension fund, outlined its intention to invest about $600 million into hedge funds over the next several months. Well, this is council’s first investment into hedge funds.

Just an overview of the pension funds market would reveal that many pension plans have modest stakes in hedge funds, while others have invested over 20 percent of their assets. For instance, Weyerhaeuser, a paper company, has 39 percent of its pension fund's assets into hedge funds. There has been strong lobbying for amendments that would make it easier for hedge funds to manage even more pension money, without having to comply with the federal law that governs company pensions.

Although, pension plan officials are moving towards hedge funds to avoid the market downturns and persistent deficits, there needs to some method to this madness. With risks that are hard to measure, hedge funds are an appropriate choice of investment for pension funds, whose sole purpose, by law, is to pay out predetermined benefits to retired workers. This requirement is something that none of the pension funds can afford to skip.

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December 1, 2005 in Emerging Markets | Permalink