Institutional Investors Flock to Hedge Funds, PE Positions

A Greenwich Associates survey found that 38% of corporate defined benefit plans would implement significant increases in their hedge fund holdings while slightly more than a fifth of the corporate plans will do the same for private equity, Dow Jones reported. Virtually no corporate plans said they would cut their hedge fund or private equity investments this year. Public fund representatives reported much the same picture with plans to radically up their hedge fund and private equity commitments.

Bigger hedge-fund allocations are coming largely at the expense of domestic equity, which is still the largest component of most pension-fund portfolios. But pension plans are also cutting back slightly on fixed income, which has shown big gains.

While endowments are already much heavier than pension funds in private equity and hedge funds, with average allocation to the former of 8% of assets and to the latter of 7.8%, large numbers of them expect to make significant increases while hardly any expect to make significant decreases, Greenwich said.

In the area of hedge funds, 11% of corporate funds were users in 2002, up from 7% in 2001, and a further 8% will start this year. Similarly, 8% of public plans were hedge fund users in 2002, up from 6% in 2001, and a further 9% will start this year. At endowments and foundations, usage was 58%, up from 50% in 2001, and 10% more will start this year.

It’s not surprising that institutional managers continue scrambling to find more robust returns in the face of the struggling equity markets since plans and endowments have shed a significant amount of assets under management because of market declines in the last few years (See    Consultant: 2000 to 2002 ‘Most Destructive’ to Pensions, Endowments).

Greenwich surveyed professionals at 574 corporate funds, 246 public funds and 212 endowments and foundations between August and October 2002.