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Pension-Fund Billions for Hedge Funds
Institutions to Invest $300B in Hedge Funds
By Alistair Barr, CBS MarketWatch.com
September 13, 2004
By 2008, institutions will have $300 billion available for hedge-fund investments, up from $60 billion today, said the Bank of New York, which conducted the study with consultant Casey, Quirk & Acito.
Defined-benefit pension plans will be the fastest institutions to increase their hedge-fund investments, the study concluded.
Stock market losses in 2000, 2001 and 2002 left many pension funds with deficits and has encouraged them to diversify equity-heavy investments.
Calpers, the largest U.S. pension fund, and ABP, the biggest Dutch pension fund, already invest substantial sums in hedge funds.
While hedge funds may offer a suitable alternative, the $870 billion industry is used to dealing with a small number of very wealthy individuals rather than large institutions, the researchers said.
"The increasing influence of institutional investors in alternative investments and particularly hedge funds will dramatically change the way firms operate and define success," said Brian Ruane, executive vice president at The Bank of New York, in a written statement.
Successful hedge-fund firms will have to balance investment prowess with business, operations and client-service skills to win a significant share of this new money, Ruane added.
When investing in hedge funds, institutions will lower their expectations for annual returns to 8 percent as they look for less-volatile investments and lower risk, the study found.
Funds of hedge funds, which place their clients' money with a range of different individual managers, will maintain their current 50 percent share of institutional hedge-fund investments, according to the study. That contradicts some forecasts that pension funds will ultimately favor direct hedge-fund investments.
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