Pensions to put more cash with hedge funds – experts

BEVERLY HILLS, California – Institutional investors like pension funds will put fresh money into hedge funds this year but they will bargain for more concessions on fees and transparency, industry experts said on Tuesday.

‘There will be significant growth in hedge funds and the public pension funds will be leading the charge,’ Stephen Nesbitt, chief executive officer of Cliffwater LLC, a consulting firm that advises pension funds on hedge fund investments, said at the 2009 Milken Institute Global Conference.Such forecasts may be welcome news to the badly battered US$1,3 trillion hedge fund industry, which reported its worst-ever returns last year.Investors punished managers who lost an average of 19 per cent last year by pulling out a record US$152 billion in the fourth quarter of 2008.Redemptions slowed in the first quarter of 2009 but were still very sizeable at US$103 billion, data from Hedge Fund Research show.Looking ahead, experts forecast that pension funds in particular will make fresh commitments in the fourth quarter of 2009. Roughly 40 per cent of all public pension funds invested with hedge funds last year, having committed about US$78 billion, industry data show.One reason that pension funds will return to hedge funds is that they are forced to earn returns of roughly eight per cent a year to make retirement payments to teachers, police officers and other state workers.’Large pension funds need to take risk,’ Nesbitt said. ‘They cannot wait this (downturn) out in Treasuries.’Hedge funds have long promised outsized returns by relying on trading techniques like selling stocks short that are off limits at most mutual funds.At individual hedge fund firms, managers are reporting the signs of new interest even though potential clients are still shell-shocked by last year’s industry meltdown.’We are seeing a lot of interest from new investors and from folks who hadn’t previously been interested in (the global macro investment style),’ said Jason Cummins, head of economic research at hedge fund powerhouse Brevan Howard Asset Management.Even hedge funds that were long closed to new investors, including Seth Klarman’s Baupost Group, are now talking to potential investors, investors said at the conference.But industry conditions are changing quickly as investors are now seeing room to negotiate conditions more forcefully, industry experts said.While hedge fund managers once charged sizeable performance and management fees, locked the money up for months or even years, and rarely told clients exactly how they made returns, they are now willing to listen to investors’ demands.California’s public pension fund known as CalPERS is leading the charge for more transparency and lower fees.CalPERS, the country’s largest public pension fund, has roughly US$5,8 billion, or three per cent of its portfolio, invested in hedge funds. It is now pressing to stop hedge funds from being able to demand hefty fees no matter whether they made or lost money.’What I don’t want to do is pay for failure,’ said Joseph Dear, CalPERS’ chief investment officer.-Nampa-Reuters