Sticky Money: Pension Plans Up Alternative Fund Exposure Levels
Equity markets have rebounded in 2009. However, investors still weary from last year’s dismal performance are looking favorably upon alternative investments to diversify their holdings. Although certainly not their best year, alternative investments have played a critical role in investors’ portfolios and been credited with helping to quell further losses. Recognizing the importance of alternative investments, many institutional pension plans are in the midst of completing asset liability and asset allocation studies either internally or with the assistance of investment consultants.
One southern U.S. employee’s retirement system has just implemented significant changes in its asset allocation with the help of a consultant. Over a three-year period, the $1.6 billion fund is moving forward with a plan to increase its absolute return portfolio from 8 percent to 12 percent, its private equity commitments from 7 percent to 8 percent, and its real estate investments from 8 percent to 12 percent. The increases come on the heels of a 10 percent reduction in domestic equity exposure. An investment analyst at the fund expressed extreme optimism in the recently approved allocation mix and expects the new targets to add substantial value and diversity to the portfolio.
A $1 billion West Coast government pension plan is following suit, recently approving a 4 percent raise each to hedge funds and private equity. Although it has historically received its hedge fund exposure through multi-manager products, the fund may consider direct investments, which will eliminate the extra layer of management and performance fees. Finally, a multi-billion dollar state treasurer’s office has implemented a 2.5 percent bump in its hedge fund exposure. The CIO was very pleased with the results of its asset allocation study and mentioned that the increase is likely to be distributed to existing managers.
The expanding allocation levels from government pension plans represent a tremendous opportunity for fund managers. Not only are such allocations usually “sticky money,” but they traditionally have eight-figure subscription amounts as well. Despite a tumultuous 2008, alternative investments may be called upon to play an even larger role in protecting these enormous pension plans from further downturns.