Sunday, November 27, 2005


Pension Plans Turn To Hedge Funds

The New York Times examines the connection between pensions and hedge funds. "Faced with growing numbers of retirees, pension plans are pouring billions into hedge funds, the secretive and lightly regulated investment partnerships that once managed money only for wealthy investors. The plans and other large institutions are expected to invest as much as $300 billion in hedge funds by 2008, up from just $5 billion a decade ago. Pension funds account for roughly 40 percent of all institutional money."

"Pension officials who have been shaken by market downturns and persistent deficits are attracted by hedge funds' promise of richer, or more consistent, returns. But some consultants and academics question whether hedge funds, with risks that are hard to measure, are appropriate for pension funds, whose sole purpose, by law, is to pay out predetermined benefits to retired workers."

"Those benefits are considered so crucial that they are guaranteed: corporate pension failures are covered by the Pension Benefit Guaranty Corporation, a federal agency. 'It's very inappropriate when the company is offering a pension plan that is guaranteed by the federal government,' said Zvi Bodie, a professor of finance and economics at Boston University."

"Accounting rules let companies factor expected pension returns into their operating income; Weyerhaeuser's hedge-fund-laden portfolio allows it to claim expected annual returns of 9.5 percent. For Weyerhaeuser, each 0.5 percent increase in the expected rate of return is worth an additional $21 million to the company's pretax income this year, according to S.E.C. filings."

"Susan M. Mangiero said she had come across pension executives who..did not even know they had derivatives in their portfolios. 'A lot of well-intentioned people don't know they don't know,' she said."

"The surge of pension money is coming at a time when the returns of many hedge funds have not been as strong as in past years, raising questions about whether pensions are arriving at the party late. Hedge funds actually lost money in four of the first ten months of this year, although they still had an overall average return of 5.7 percent."

"Those returns easily beat the stock market. But as they continue to attract money, hedge funds may start to more closely mimic the performance of plain old stocks and bonds. 'There is no such thing as a free lunch,' said Frank Partnoy. 'And even if there were, nobody is offering it to pension funds.'"

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