“We’d be missing a big opportunity to grow the fund in a tough fiscal climate if we only add emerging managers as an afterthought,” de Blasio wrote in a letter. “If we only stick with the manager traditionally in our Rolodex, small and newer managers who typically generate bigger returns will be left out.”

A spokesman for City Comptroller John Liu said the pension system will probably make its first real investments in hedge fund by the beginning of next year.

“We are beginning to build a direct hedge fund portfolio, which will be approximately 4% to 5% of each participating NYC pension fund and should ultimately approach $4 billion,” the spokesperson said.

Public Pension Funds

Other intentions for the next year are for around 36 percent of public pension funds to “make extra allocations to the asset class in the next 12 months.”  Around half of these want to make “fund of funds commitments.”  Out of the private sector pension funds that want to escalate their hedge fund allocations over the next year, approximately 67 percent are seeking ways of investing in “funds of hedge funds.”  From that figure, about 50 percent with investment plans want to make the investment with North America-based managers.

European Investors

When we look at the world of Europe we find that these investors are really into making new commitments.  Figures from Hedgeweek show that 45 percent are looking for new opportunities.  That’s a pretty large figure in and of itself.  But if you compare it to the figure for North American based investors, you can really tell how big it is as that region only had 29 percent seeking the same and with Asia and the rest of the world, it was just 32 percent.

With the investors, 87 percent are looking to invest in short/long equity “as a strategic preference,” with 58 percent “taking an opportunistic approach.”  As well, 83 percent “anticipate including an allocation to one or more single-manager funds.”

Conclusion

According to the main reporter of the Preqin research, Katherine Johnson, “with nearly a third of the investors on the Preqin database having fixed plans for new investments in the next 12 months, and many others investing opportunistically or considering new allocations, the future is looking bright for the industry.  Investors could invest up to USD195 billion in the next 12 months, with up to 2,000 funds currently being sought. Funds of hedge funds, pension funds, insurance companies and a large number of other investor groups are looking to increase their hedge fund portfolios in the next year. These investors are seeking a wide range of strategies and structures and therefore it is vital that managers have the best intelligence on these investors if they are to gain a slice of this capital.”

A recent presentation delivered by Blackrock Alternative Investors focused on the positive aspects of alternative investments along with the “diversifying role they can play in institutional client portfolios.” There were three speakers: Matthew Botein (MD and company head); Marcus Sperber (head of the company’s international real estate business) and Ken Kroner (Global Market Strategies Group [GMSG] head). Talks focused on the market challenges investors face today and how these can be encountered through alternatives. Since pension funds now have fewer options than they did some years ago due to decreasing bond yields and increasing asset prices, alternatives now have a potentially larger role. Of course, market fluxes and increasing inflation are going to provide additional challenges too. As Botein noted, institutional investors are now seeking better returns as well as “downside protection against rising prices.” In the UK especially, those with pensions are looking for ways to “de-risk.” As well, there is a greater understanding of bond and equity risks so again, alternatives are looking increasingly attractive, especially vis-à-vis inflation. This is because alternatives have the capacity to deal with these types of challenges and thus they are heading towards increased success. There is a predicted 59 percent aggregate growth this year, which is substantially higher than the figure for just two years ago. As Botein pointed out, “if we take a portfolio of equities and bonds and add in real estate, commodities, hedge funds, the portfolio, whilst enhancing returns, begins to exhibit lower volatility and correlation.”

Investors Vis-à-vis Real Estate

On the matter of real estate and investors, according to Sperber, during good times (as in, pre-global crisis) investors were raking it in at close to 20 percent per year) but there was the possible obstacle of them not quite understanding the risks associated with “opportunistic strategies.” Thus, Sperber’s advice to investors is to make “sensible” allocations while forming an understanding of “exactly what it is their investment managers are doing.” Today’s investment market focuses ways more on “core assets,” with this style now sitting at around 65 percent as opposed to the 10 percent figure in 2008.

Hedge Fund Strategy Discussion

At the end of the presentation Ken Kroner spoke about “global macro as a suitable hedge fund strategy for institutionals given that it has evolved over the last 15 years to meet their demands.” The strategy has clearly proven effective since in the last two decades it has “delivered 4-times the risk/return rate versus equities.” With these according to Kroner, “and investors have a clear understanding of the driver behind investment decisions.” Since global macro managers are able to invest in anything due to unstable global markets, this is also advantageous. It is very attractive to investors that all investment views “can be expressed.” Kroner concluded by saying, “global macro is one of the most liquid strategies in the hedge fund space and able to deliver diversified returns. It’s no longer a case of ‘have a hunch, buy a bunch, go to lunch’. Sound economic decisions, liquidity and a clear evolution enable global macro to meet the needs of today’s institutional investors.”

Today over 6% of all pension fund assets are of the Taft-Hartley variety, representing 420 billion dollars worth of investment capital. Since this is certainly a significant amount of money, it is worthwhile to learn a bit about what these funds are.

Taft-Hartley pension funds are the way companies provide benefits to their employees at retirement. The funds are composed of contributions which the employer makes on behalf of their employees, contractually negotiated by the union that the worker is a member of; and the gains or losses that the fund is subject to while it is invested by the fund’s trustees.

Trustees are appointed in equal number by both the union and the employer, and are responsible for overseeing the investment and deciding what benefits the plan can afford upon retirement.

Usually investment firms are given the responsibility of overseeing the fund’s investment strategy as the trustee. There are many firms which oversee Taft-Hartley pension funds, including EnTrust Capital Inc.; McMorgan & Company, John F. Santaguida managing director, and consulting firms, such as Milliman, which advise trustees on how to focus on targeting the investment returns assumed by the plan.