The hedge fund industry has grown 10 percent a year since the financial crisis, much of that from higher allocations by public and private pensions, according to an association representing hedge fund interests.
Pensions have well over $700 billion invested in hedge funds at the moment, representing about $1 of every $4 invested in these funds, the Alternative Investment Management Association said.
All told, hedge fund investments returned $1.5 trillion after fees to their investors over the past 10 years, the AIMA said.
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"The Way Ahead: Helping trustees navigate the hedge fund sector" is the first in a series of papers the association will publish in response to renewed questions of hedge funds' place in institutional portfolios.
"Rarely has there been such demand for a realistic assessment of the benefits — and also the risks — associated with hedge fund investing," said Jack Inglis, AIMA's CEO.
That demand for realistic assessments has no doubt been influenced by CalPERS' decision to carve all hedge fund investments out of its portfolio.
The California public employees' pension plan is the largest in the U.S., valued at $295 billion at the end of 2014.
The decision to cut its $4 billion hedge fund allocation was a part of an "ongoing effort to reduce complexity and costs" in CalPERS investment program, according to a statement at the time of the decision.
Hedge fund growth outpaced all other alternatives last year, as assets swelled to $3.02 trillion from $2.66 trillion in 2013, according to Preqin, a data provider to the alternative assets industry.
That was in spite of meager returns – 3.78 percent in 2014, the lowest the investment class has registered since 2011. By comparison, the Dow Jones Industrial Average returned 7.5 percent in 2014.
William Kelly, CEO of CAIA Association, the non-profit, educational arm of the AIMA, said wider acceptance of hedge funds and other alternatives in pensions will take more work.
"(It) will depend greatly on the ability to educate investors not just on the fundamentals of the products, but also on the role these funds are designed to provide within an overall portfolio," he said.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
