GLOBAL - The number of public pension systems investing in hedge funds has grown by 50% over the past four years, research by Preqin shows.
The research firm said 295 public pension plans worldwide are now known to be allocating to hedge funds, up from 196 in 2007. The mean allocation to the asset class has also grown in the same period from 3.6% to 6.6% and is now one percentage point higher than the average private equity allocation of these investors.
Preqin found public pension systems generally invest in hedge funds for capital preservation and portfolio diversification purposes and seek absolute returns of 6.1%. This is lower than the average expectations of other investor types, which stand at 7%.
Funds of hedge funds are also popular with pension funds - four-fifths of public pension systems making their first investments into the asset class in 2010 did so through multi-manager allocations. Overall, some 70% of all pension funds investing in hedge funds have funds of funds commitments in their portfolios.
Hedge funds have outperformed public pension funds' average annualised return expectations of 6.15% by producing average returns of 9.8%. Despite negative returns over a three-year timeframe, public pension system investors have increased their allocations to the asset class. This is in stark comparison to the many high-net-worth counterparts that have reduced their hedge fund commitments during the period, Preqin said.
Preqin hedge fund data manager Amy Bensted added: "Public pension funds are one of the most influential groups of investors, and their increased uptake of hedge funds is shaping the new institutional era of hedge fund management.
"Pension funds have realistic return expectations, and as they gain more experience of the asset class, there has been a fundamental shift in these investors towards allocating
to hedge funds for capital preservation and portfolio diversification."
Research released by Preqin in October found private pension funds had almost doubled their average allocations to hedge funds since the financial crisis began.
It said the average private pension scheme boosted holdings in hedge funds from 5% in 2007 to 9%. (Global Pensions: 7 October 2010)
And this week, the State of Texas said it was considering doubling the amount the Teacher Retirement System (TRS) is able to invest in the asset class. (Global Pensions: 16 March 2011)
PP has compiled a list of what to watch out for over the coming months.