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Pension funds predicted to increase hedge funds exposure in the coming years

The current pension allocation is only a fraction of the allocation of many of the leading endowment funds, many of whom have up to 50% of their portfolio invested in hedge funds.

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Approximately 5% of pension plan assets are invested in hedge funds, Agecroft Partners, a global consulting and third party marketing firm for hedge funds reported today. Pension plans which have an approved allocation to hedge funds also have an average of 8% of their assets devoted to this sector.

The current pension allocation is only a fraction of the allocation of many of the leading endowment funds, many of whom have up to 50% of their portfolio invested in hedge funds.

"In a fully discretionary asset allocation model, with no constraints, hedge funds would assign an allocation multiple times this current level, which is where Agecroft believes the industry, will gravitate over time. Ten years ago, the average pension plan allocation to hedge funds was less then 1% and only a very few corporate pension plans had an allocation to hedge funds, with some of the first including General Motors, General Electric, and Weyerhaeuser" Don Steinbrugge, Chairman of Agecroft Partners, said.

In 2001, CALPERS became the first public pension plan to allocate directly to hedge funds. Since then, there has been a consistent increase in the average percent of their assets allocated to this sector.

The typical process most large pension plans follow to achieve their hedge fund allocations begins with a very small initial allocation utilizing hedge fund of funds. This is increased every few years as the pension plan increases its knowledge of the hedge fund market place.

Today, an overwhelming majority of the hedge funds a pension plan will invest in at this stage of the process are the largest, “brand name” hedge funds with long track records. Agecroft Partners predicts that pension plans will significantly increase their exposure to mid-sized hedge funds over the next decade.

"The pension fund industry is in the process of a major evolution in its use of hedge funds that has implications on what percent of their portfolio they allocate to hedge funds and how they achieve their hedge fund exposure, which will have profound implications for mid-sized fund managers." Don Steinbrugge concluded.

Next Finance , November 2010

Article also available in : English EN | français FR

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