Pensions warned on hedge funds (as they lose billions on long-only funds)

22 April 2008

The Chief Investment Officer of Dutch insurance firm Interpolis told a conference audience recently that hedge funds and structured products will drag down pension returns in the future.  Reports IPE.com:

“Lack of clarity on the value of illiquid investments may result in very disappointing returns of hedge funds and structured financial products, according to Bob Puijn, chief investment officer for pensions asset management at Interpolis. After the attractive returns seen over the last couple of years, pension funds may see twice the return but it is likely to be in the red rather than delivering a positive gain, he suggested during the spring congress of the Circle of Pension Specialists (KPS). As a result, pension funds enjoying a 10% gain until now could, for example, see a negative return of –20%.”

It’s certainly not unlikely that some pension fund somewhere will invest in a hedge fund or structured product that could lose 20% in the future.  Although with overall hedge fund allocations in the low single digits for most investors, even that loss would only put only a small dent in returns.   

But apparently pension funds have become quite adept at losing it on their own - without the help of such forecast hedge fund drawdowns.  A Northern Trust study released today concludes US pension funds are down due to their long-only equity portfolios.  According to the firm’s press release:

“‘Virtually all plan types were negatively impacted to some degree by the turbulent market and economic conditions experienced in the first quarter of 2008,’ said Craig Tome, product manager, Northern Trust Investment Risk & Analytical Services. ‘For plan sponsors, this was the worst-performing quarter since the third quarter of 2002.’

“Within the Northern Trust Universe, Corporate and Public Funds plans posted median returns of -5.7% and -5.1%, respectively, for the quarter while Foundations & Endowment plans performed slightly better with a median return of -4.7%.”

Strangely, the press release made no mention of hedge funds or structured products.

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