Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance

Public Pension Plans

Pension Plans are long-term pools of capital that are managed for the benefit of government or company retirees. Pension plans that have been established for both public organizations and private firms are significant investors in both alternatives and hedge funds. The long-term outlook of these plans makes them a good match for products that are illiquid, are hard to value, and take time to generate results. Pensions have historically invested in private equity, venture capital, and hedge funds. Only the largest pension funds in the world invest directly in hedge funds, due to the need for complicated and time-consuming due diligence before investing. Smaller plans tend to use commingled products such as funds of hedge funds (FoFs) to invest in the asset class. These FoFs require an additional layer of fees but can deliver research, diversification, and access to funds well beyond the capabilities of smaller plans.

Globally, the largest pension plans account for an increasing amount of the assets managed by hedge funds. Although only a small percentage of the world's plans are investing in the sector, the impact is significant because of the size of the plans. A 10 percent allocation from a $200 billion public plan such as the California Public Employees Retire System (CalPERS) is $20 billion. Every 1 percent change in this plan allocation means a movement of $2 billion into the sector. On a global scale, the world's pension plans control upward of $25 trillion ...