Report Urges US Schemes to Up Hedge Fund Exposure

(September 15, 2011) — A new research report claims that US pension funds could increase returns by more than $13 billion a year if they reallocate 10% of their portfolios to hedge funds.

“Hedge funds have evolved from an elite investment to a standard component of investment portfolios, and in so doing, offer institutional investors, such as pension funds, the opportunity to improve returns,” wrote the report’s author Dr. Everett Ehrlich, a business economist at Washington-based consultancy ESC Company, who was previously the Under Secretary of Commerce for Economic Affairs in the Clinton administration. “The modeling performed for this analysis suggests that a modest allocation to hedge funds would improve the returns to public pension funds by approximately $13 billion annually. Moreover, the track record of recent years further illustrates that hedge funds have not been a source of greater systemic risk — rather than ‘too big to fail,’ they are generally not an important source of systemic risk,” stated the report, titled “The Changing Role of Hedge Funds in the Global Economy.”

Ehrlich added that university endowments would also benefit from a greater allocation to hedge funds.

The report stated: “Given the relatively low level of hedge fund holdings among these institutions, the pressures to improve returns, and the modeling results suggesting that hedge funds offer both a higher return and a reduction in earnings volatility, we should expect greater hedge fund holdings by these institutions in the future.”

Another recent study by Citi Prime Finance has revealed a renewed commitment to the asset class among institutional investors. A June study by the firm showed institutional investors had $1.1 trillion in hedge funds at the end of the first quarter. At the same time, following the global financial crisis, the firm found a noticeable shift to direct investing in hedge funds by pension and sovereign wealth funds, as opposed to using traditional fund-of-funds.