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Pensions Investing In Alternatives

Despite the fact that some of the nation’s largest pension funds have divested from hedge funds in the last couple of years (most recently MetLife who this month said is eliminating the majority of its $1.8bn in the asset class; along with the New York City Employees’ Retirement Systems (“NYCERS”) which last month announced it would liquidate its $1.5 billion hedge fund portfolio; and California Public Employees' Retirement System (“CalPERS”) who in September 2014 said it would redeem its $4 billion hedge fund assets), the majority of pensions should still consider alternative investments given their numerous benefits. 

At this month’s EisnerAmper monthly breakfast series solely for fund managers and investors, a trio of industry veterans shared their outlook on pensions investing in alternatives including their benefits, strategies expected to do well, and things managers should know when targeting this investor group.  

Benefits: 

  • Alternative investments, both hedge funds and private equity, among other assets, are essential in driving pensions’ returns.
  • Since pension funds are required to make an actuarial rate of return to meet their liability of paying the pensioners, with ongoing volatility in the equity markets challenging performance, employing alternative investments can help them meet their actuarial target and create return streams to offset this equity and credit beta. 

Strategy Spotlight: 

  • Pensions should highly consider investing in emerging markets to capitalize on their dislocations.
  • Real assets including infrastructure and real estate are garnering interest due to their attractive valuations.
  • Finally, the private credit space will continue to receive pension money since both banks and GE, a lender to large organizations, have exited the space; hence such private equity structures and direct lending strategies have filled the void.

Manager Preparation:

  • Managers should be prepared to negotiate their fee terms with pension funds who will demand the lowest fees possible; and further, funds can accommodate them to incentivize early investors, offering them discounts.
  • Emerging managers should not shy away from pensions since many have dedicated emerging manager programs. 
  • Since pensions get limitless manager inquiries, managers need to be resourceful in finding their contact information and LinkedIn is one very successful tool. 

EisnerAmper would like to thank the panelists for their time and insights:

  • Simon Fludgate, Partner, Head of Operational Due Diligence, Aksia
  • Sean Holland, Former Private Equity Co-Manager, New York State Teachers' Retirement System
  • Darren Spencer, Director, Client Portfolio Manager-Alternative Investments, Russell Investments

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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