Our Insights

June 2016

Hedge Fund-ing the Pension Deficit

Joseph Marenda, Max Gelb

Pension series image

Select hedge funds have provided attractive long-term returns with reduced equity beta and can be integral to pension investment strategies.

  • Continuously low interest rates have driven funded status lower for many defined benefit pensions over the past seven years, highlighting plan sponsors’ continued need to allocate funds to risk-controlled growth strategies that can help close the funding gap and pay for future accruals.
  • Low beta hedge funds may help pensions generate excess returns with limited directional equity exposure, thereby diversifying the portfolio, improving risk-adjusted returns, and reducing potential funded status drawdowns.
  • Including hedge funds in a holistic de-risking strategy is especially attractive in the current environment, as record low bond yields and overvalued equity markets present limited return opportunities and increased risk across traditional assets.
  • Given the significant dispersion in hedge fund manager and strategy returns, effective manager selection and portfolio construction are critical.