Report Urges US Schemes to Up Hedge Fund Exposure

A new research paper has asserted that pension funds in the United States should increase their allocation to hedge funds by 10% to boost returns by up to around $13.67 billion a year.

(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.”

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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.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

CalPERS has publicly censured a board member for alleged involvement in a personnel action based on complaints filed by coworkers in addition to adopting governance reforms.

(September 15, 2011) — The California Public Employees’ Retirement System (CalPERS) Board of Administration has publicly censured current board member JJ Jelincic as a result of personnel complaints filed against him by coworkers at the pension fund.

“The CalPERS Board does not condone harassment or similar conduct of any kind and all our Board Members are expected to meet this standard,” said Rob Feckner, president of the CalPERS board, in a statement. “Our employees are one of our greatest assets and we are committed to ensuring that their work environment is professional, safe and free from all forms of discrimination and harassment.”

The board suspended Jelincic — who was elected to the CalPERS Board in December 2009 as an at-large representative of state employees — from his position as chairman of the pension fund’s Investment Policy Subcommittee and as vice chairman of the Health Benefits Committee until March 1.

Meanwhile, the largest public pension fund in the United States has also adopted governance reforms in an effort to further strengthen accountability, transparency, and ethics at the fund.

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“When we released our special review report on placement agents in the spring, it was a clear reminder that the stewards of CalPERS have to protect a sacred trust, one that should never be allowed to be compromised,” said Feckner in a statement. “We dedicated ourselves to pursuing all of the appropriate policy changes to strengthen transparency, accountability and integrity of this fund. Today, those changes are in place.”

As outlined in a release by the scheme, the governance reforms urge:

1) Each Board Member to sign a statement acknowledging their fiduciary responsibilities in conjunction with fiduciary training and self-assessment processes.

2) An independent third party to assess Board performance once every two years.

3) New roles and responsibilities for the Board President, Vice President, Committee Chairs and Vice-Chairs.

4) A new Powers Reserved structure for the Board and its committees that outlines responsible parties for approvals, standards of conduct, strategy, policy and performance.

5) Certification of a “no undue influence” document to be signed by all senior executives and investment officers.

6) Adoption of a new confidentiality policy that will assist in guiding Board conduct.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742