The research revealed that roughly one in every four dollars managed by the global hedge fund industry today is from public and private pension plans, and this proportion is increasing.
Uncorrelated and risk-adjusted returns are among the most important objectives cited by investors who invest in hedge funds, the report said, adding that investors have earned a combined $1.5trn after fees from hedge funds in the last 10 years.
“The global hedge fund industry has grown at approximately 10% a year since the financial crisis, and much of this growth can be attributed to increased allocations from public and private pensions,” said Jack Inglis, AIMA chief executive.
Hedge funds currently manage over $700bn from pensions worldwide and more than $2tn from institutional investors generally, Inglis said.
As capital flows into hedge funds, pension fund trustees are raising questions about existing or prospective hedge fund allocations.
“Rarely has there been such demand for a realistic assessment of the benefits – and also the risks – associated with hedge fund investing,” Inglis said.
Traditionally, pension funds have avoided investing in high-risk asset classes such as equities.
“Continued growth and acceptance will depend greatly on the ability to educate investors not just on the fundamentals of the products, but also on the role these funds are designed to provide within an overall portfolio,” said William J. Kelly, CEO at the CAIA Association.
According to a recent State Street survey, hedge executives remain optimistic about pension fund allocations. More than half (55%) of respondents expect pension funds to increase their exposure to hedge fund strategies over the next five years.