Pensions’ Hedge Fund Returns Down Slightly From 2010

Oct 17 2011 | 8:40am ET

Although hedge funds are not providing quite the same returns to U.S. public pension funds that they did last year, they do seem to be helping pensions manage volatility.

Pensions & Investments evaluated 13 pension fund hedge fund portfolios (ranging in value from $5.6 billion to $851 million) and found that as of June 30, their average 12-month return was 10.3%, compared to 11% for the eight plans P&I analyzed in 2010.

Four of the 13 hedge fund portfolios outpaced the HFRI Fund Weighted Index, which tracks single and multi-strategy funds and which returned 11.5% over the monitored period. In 2010, six of the eight funds reviewed outstripped the index, which registered a 9.1% one-year return.

Hedge fund portfolio returns ranged from 5.9% to 18.8% for the 13 funds analyzed in June 2011, and handily beat internal benchmark returns which ranged from 2.3% to 18.3%.

Compared to the HFRI Fund of Funds Composite Index, 11 of 13 hedge fund portfolios outperformed its 6.7% returns; in 2010, all the hedge funds surveyed beat the fund of funds index, which returned 4.7%.

Hedge fund returns over the monitored period paled compared to equity market returns—as of June 30, the Standard & Poor's 500 index had returned 30.7% and the Morgan Stanley Capital International World index, 31.2%. As a result, the pension funds analyzed by P&I registered total fund returns ranging from 18% to 24%.

But to Darren W. Spencer, director of alternative investment consulting for the Americas for Russell Investments, the data shows that hedge funds are doing what they’re supposed to be doing for pension funds.

“The hedge fund value proposition was validated during this period,” Spencer told P&I. “If you look into the individual portfolios of hedge fund managers and of institutional investors, it's clear that hedge funds did what they are supposed to do by generating returns to help pension funds, especially public plans, meet their funding objectives with significantly less volatility than equity markets.”

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