Clinton Admin Vet Says Pensions Could Earn $13B By Allocating To Hedge Funds

Sep 13 2011 | 1:54pm ET

A former undersecretary of commerce from the Clinton era claims “modest” allocations to hedge funds could boost returns to U.S. public pension plans by about $13 billion annually.

In his report—“The Changing Role of Hedge Funds in the Global Economy”—Dr. Everett Ehrlich uses quantitative modeling to calculate hedge funds’ contribution to investment portfolios, and says that the encouraging results apply equally well to university endowments, which could earn as much as $1.73 billion annually by allocating to hedge funds.

“Institutions like pensions and universities are increasingly turning to hedge funds to manage risk and produce returns,” said Ehrlich, now president of ESC Company, an economics consulting firm in Washington, D.C., in a statement.  “I wanted to quantify the contribution of hedge funds to these portfolios and the results I found were telling—hedge funds could potentially boost returns for these investors by billions each year.  Hedge funds won’t solve the pension crisis by themselves, but with $13 billion on the table, I’d expect more state and local governments will make them part of the solution moving forward.”

Ehrlich’s paper explains the objectives of hedge funds, estimates their potential value to institutional portfolios and examines some of the basic public policy concerns surrounding the role of hedge funds in financial markets.

The author also suggests that hedge funds, rather than being “too big to fail,” are “generally not an important source of systemic risk.”

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