Public funds represent some of the U.S.’ largest institutional investors. These funds are a pool of money saved for retirement by those who are still working. Boards of Directors of these funds have strict standards for their investments, as the money they are investing is not their own; rather, it comes from the thousands of workers that pay into the funds. Alternative investments such as private equity, private debt, real assets, real estate, and hedge funds are historically more risky than traditional public equities or fixed income investments. Recently, public funds’ investments in hedge funds have been called into question not only by the boards of these funds but also by the fund participants themselves. With high fees, low transparency, and currently average returns, investing in hedge funds has become a popular topic in the institutional investment industry.
This research looks to perform an in-depth analysis on a sample of public funds with investments in hedge funds. Limited to the last ten years, data from eight public funds with over $15 billion in AUM was analyzed. These funds were chosen due to their hedge fund data availability ranging from FY 2007 through FY 2016, and because they had AUM of at least $15 billion, ranging as high as$133 billion as of September 2016. The analyses on these funds were done in three sections: Pre-Financial Crisis, During the Financial Crisis, and Post-Financial Crisis. Annual reports, news articles, manager reports, consultant reports, and institutional investor authored reports were used.
An analysis of the public funds within the sample and a review of current market sentiment on hedge funds revealed that there are split thoughts on the investment vehicle. Some public funds within the sample, like Virginia Retirement System, have a positive outlook for hedge funds, while New Jersey State Investment Council has looked to decrease their hedge fund allocation. The ten-year review on the sample showed that allocations to hedge funds have increased over the time period but over the past two years specifically allocations have declined slightly. A highly valued equity market since the financial crisis has negatively impacted hedge fund returns. Despite underperforming traditional asset class returns, I believe public fund investment in hedge funds is still beneficial.
This research faced certain data limitations due to lack of disclosure in alternative investments pre-Financial Crisis. Although disclosure in hedge funds increased after the financial crisis, it only did so marginally. Due to this, original graphs and charts may not include data from all public funds within the sample. The results of this research call for future analyses into the types of investors public funds should be given different market environments.
Steadwell, Morgan, "Public Fund Strategic Asset Allocation to Hedge Funds: A Time Series Analysis" (2017). Honors College Theses. 156.